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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______________ to _______________.
Commission file number: 000-28460
FUSION MEDICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 96662349
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
1615 Plymouth Street, Mountain View, California 94043
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (650) 903-4000
Securities registered pursuant to Section 12(b)
of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $.001 par value
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock on March 22,
2000 as reported on the Nasdaq National Market, was approximately $93,327,208.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. The determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of March 22, 2000, the Registrant had 10,049,764 shares of Common Stock
outstanding.
____________________________
DOCUMENTS INCORPORATED BY REFERENCE
The information called for in Part III is incorporated by reference from
the Proxy Statement relating to the Annual Meeting of Stockholders of the
Registrant to be held on June 15, 2000.
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Fusion Medical Technologies, INC.
INDEX
PAGE
NUMBER
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PART I
Item 1. Business........................................................... 3
Item 2. Properties......................................................... 21
Item 3. Legal Proceedings.................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders................ 21
PART II
Item 5. Market for Registrant's Common Equity and Related .................
Stockholder Matters................................................ 22
Item 6. Selected Financial Data............................................ 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 24
Item 7A Quantitative and Qualitative Disclosures about Market Risk......... 28
Item 8. Financial Statements and Supplementary Data........................ 28
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure ...........................................28
PART III
Item 10 Directors and Executive Officers of the Registrants................ 29
Item 11 Executive Compensation............................................. 29
Item 12 Security Ownership of Certain Beneficial Owners
and Management..................................................... 29
Item 13 Certain Relationships and Related Transactions..................... 29
PART IV
Item 14 Exhibits, Financial Statement Schedules............................ 30
Signatures ................................................................ 31
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PART I
ITEM 1. BUSINESS
THE BUSINESS SECTION AND OTHER PARTS OF THIS REPORT ON FORM 10-K CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED, THOSE DISCUSSED IN THE SECTION ENTITLED "BUSINESS - RISK
FACTORS" COMMENCING ON PAGE 15.
THE COMPANY
We are developing and commercializing proprietary products as surgical
hemostatic sealant products. Hemostatic products are devices, such as sutures,
and topical agents, such as sponges, used to stop bleeding. Our current
commercial product, FLOSEAL(R) MATRIX HEMOSTATIC SEALANT "FLOSEAL", combines a
gel derived from collagen with thrombin, a potent clotting agent, to control
surgical bleeding.
FloSeal received approval for marketing in the U.S. from the FDA on
December 8, 1999 and we began selling FloSeal within 48 hours into the U.S.
market, which we estimate to exceed $250 million. FloSeal is indicated, in the
U.S. for all surgical specialties except neurosurgical, ophthalmic, and
urological. To address the broad hemostatic sealant market for FloSeal, we have
implemented a hybrid sales strategy. We are initially focused on three vital
markets: cardiac, vascular, and spinal surgical markets. To address the cardio
and vasuclar surgical specialty markets of cardiac and vascular surgeries in the
U.S., we have built a direct sales force. To address the spinal and cranial
surgical specialty markets, we entered into a world wide distribution agreement
with Sulzer Spine-Tech in July 1999. And, to address the cardiac and vascular
surgical specialty markets in Europe, we are selling through regional
distributors.
We believe the innovative physical structure of FLOSEAL provides certain
performance advantages over existing surgical hemostatic products, such as fast
and effective bleeding control even in challenging applications, quick and easy
onsite preparation, excellent handling and total absorption by the body within
six to eight weeks.
In December 1998, we completed a 309 patient clinical trial. The primary
endpoint of the clinical trial, which included cardiac, vascular and spinal
surgery patients, was to show FloSeal stopped bleeding within 10 minutes of
application at least as frequently as the Gelfoam plus thrombin control. The
trial showed FloSeal stopped patients' bleeding within 10 minutes in 96 % of all
patients treated with FloSeal, whereas Gelfoam plus thrombin stopped patients'
bleeding within 10 minutes in 77 % of all patients in the control group. The
trial also showed FloSeal stopped heavy cardiac bleeding within three minutes in
77% of patients, as compared to 0% for the control group where Gelfoam plus
thrombin was used. Lastly, FloSeal stopped patients' bleeding at least two times
more quickly than Gelfoam plus thrombin.
We are also developing additional configurations of FLOSEAL as well as
additional products designed to stop bleeding based upon our core proprietary
technology. A configuration of FloSeal for use by ear, nose and throat (ENT)
surgeons is in the final stages of development and we expect to commercialize
the product in the U.S. in late 2000.
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BACKGROUND
Surgical wounds must be effectively closed and bleeding controlled to
ensure the success of surgical procedures. Failure to close surgical wounds
completely can result in serious or possibly life-threatening complications,
including blood loss, tissue damage, infection and excessive scarring. A variety
of hemostats have been developed to help surgeons control intraoperative
bleeding, including devices such as sutures and staples, as well as topical
hemostatic products, such as sponges, like Gelfoam(R), and commercial fibrin
glues. Topical hemostatic products are a popular means of supplementing sutures
and staples in applications where sutures and staples are not entirely effective
in controlling bleeding.
SUTURES AND STAPLES
Historically, sutures have been the most common type of product used for
closing surgical wounds. Sutures mechanically bring together the tissue on
either side of a wound to facilitate healing. In the 1960s, surgical stapling
was introduced to reduce the time-consuming and cumbersome aspects of suturing.
Surgical stapling involves drawing together tissue through the application of
staples along the line of incision using a manually operated device. Industry
sources estimate the annual worldwide market for sutures and staples is
approximately $2.3 billion.
Sutures and staples have a number of limitations. In particular, they do
not have inherent sealing capabilities and thus sometime do not eliminate
bleeding along suture lines, especially when connecting blood vessels. The
physical structure of sutures and staples makes them often ineffective in
stopping bleeding associated with fragile tissue and organ wounds because such
sites often lack the structural integrity required to hold such devices in
place. Similarly, sutures and staples, because of their size limitations and the
mechanics of applying them to the site of a wound, are difficult or impossible
to use in certain types of surgeries where access to the surgical site is
limited, such as minimally invasive procedures.
TOPICAL HEMOSTATS
Topical hemostats provide the surgeon with additional means for controlling
bleeding in procedures in which sutures and staples are not entirely effective.
Numerous materials have been used to achieve hemostasis in surgical procedures,
including pads, like Avitene(R), sponges, like Gelfoam, used with and with out
thrombin, and thrombin alone. While existing topical hemostats are a popular
complement to sutures and staples, they have several limitations, including the
following:
o LIMITED EFFECTIVENESS - Topical hemostats do not work well on all
types of bleeding. It is often the time and pressure that cause the
bleeding to stop.
o REBLEEDING MAY OCCUR AFTER APPLICATION - Since topical hemostats are
usually in sponge or pad form, when a blood clot is formed, the clot
becomes embedded in the topical hemostat. So, when the pad is removed,
rebleeding often occurs.
The limitations of current products have been particularly pronounced in
procedures involving suture lines in blood vessels, such as in coronary artery
bypass grafts, and in patients with compromised coagulation. Despite these
limitations, topical hemostats have achieved significant sales to date. We
estimate annual sales of topical hemostats, including Gelfoam plus thrombin,
exceeded $120 million in 1999. The sales were almost entirely within the United
States.
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FIBRIN GLUES
Fibrin glues and other types of surgical sealants and adhesives also have
limitations.
o LENGTHY AND COMPLEX PREPARATION- Some fibrin glue products require as
much as 40 minutes to prepare. Others require medical procedures, like
drawing a patient's blood hours before their surgery to extract
components of their blood, utilizing specialized equipment, for use in
the glue.
o DIFFICULT TO USE - Most fibrin glues are liquids. Placing liquid on a
very wet (bloody) surface causes the liquid glue to flow off the
bleeding site. Surgeons are required to dry the site (stop the
bleeding) prior to using the glue which is supposed to stop the
bleeding.
We estimate the annual U.S. sales of fibrin glue, approved by the FDA in
May 1998, to have been $35 million in 1999. In 1999, international sales of
fibrin glue, however, were approximately $300 million, of which we believe that
over 60% were attributable to bleeding control.
THE BENEFITS OF FLOSEAL
Our current commercial product, FLOSEAL, a proprietary gel derived from
collagen combined with thrombin, is designed to complement sutures and staples
and to overcome limitations of other existing products used to control bleeding,
including topical hemostats, fibrin glues and other types of surgical sealants
and adhesives. Our U.S. clinical trial demonstrated the effectiveness of FLOSEAL
in stopping bleeding in cardiac, vascular and spinal surgeries. We believe
FLOSEAL offers the following key performance advantages:
o STOPS BLEEDING RAPIDLY AND EFFECTIVELY. FLOSEAL'S proprietary physical
structure rapidly induces stable clot formation and seals the wound
site, even in challenging surgical situations, including very wet
tissue and heavily bleeding sites. For example, in cases of heavy
bleeding experienced by some cardiac patients in our trial, FLOSEAL
stopped bleeding within three minutes in 77% of patients treated.
o STOPS VARIOUS TYPES OF BLEEDING. A subanalysis in our clinical trial
demonstrated that FLOSEAL stopped all degrees of bleeding encountered,
ranging from lighter "oozing" to heavier "flowing" and "spurting". We
believe FLOSEAL is the first product to effectively control
substantially all of these types of bleeding. For example, a secondary
endpoint analysis in our clinical trial showed in cases of heavy
bleeding experienced by some cardiac patients FLOSEAL stopped bleeding
within three minutes in 77% of patients treated with FLOSEAL, as
compared to 0% for those treated with Gelfoam plus thrombin. In
addition, we believe FLOSEAL addresses bleeding associated with
fragile tissues, diffuse organ bleeding and high pressure arterial
bleeding, including bleeding in patients being treated with
anti-coagulant drugs. Data from the clinical trial are included below
under the subsection entitled "Fusion's Products."
o EASY TO PREPARE. FLOSEAL can be prepared within two minutes and can be
used for up to two hours after preparation. No special equipment is
required during preparation, and all materials are contained in one
simple package.
o EASY TO USE. FLOSEAL is easy to apply using a standard disposable
syringe and has a gel-like granular consistency which rapidly conforms
to the application site. The surgeon can either remove any excess
material without difficulty by gentle irrigation of the treated area
or leave it to be absorbed by the body. Since only minimal training is
necessary, we have seen both surgeons and nursing teams quickly learn
how to use the product.
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o BROAD APPLICABILITY. In the U.S., FLOSEAL is indicated in most
surgical procedures (other than in neurosurgical, ophthalmic, and
urological) as an adjunct to hemostasis when control of bleeding by
ligature or conventional procedures is ineffective or impractical. In
non-U.S. locations, FLOSEAL is indicated in surgical procedures as an
adjunct to hemostasis when control of bleeding by ligature or
conventional procedures is ineffective or impractical.
o BIOCOMPATIBLE AND SAFE. FLOSEAL is biocompatible and fully absorbed by
the body within approximately six to eight weeks, consistent with the
body's normal healing process. Since FLOSEAL does not have to be
removed after application, rebleeding generally does not occur. The
materials used in FLOSEAL, collagen and thrombin, are naturally
occurring materials that have a safe history of use in humans.
SALES AND MARKETING
FloSeal received approval for marketing in the U.S. from the FDA on
December 8, 1999 and we began selling FloSeal within 48 hours into the U.S.
market, which we estimate to be exceed $250 million.(see TARGET MARKET). This
market is composed of all surgical specialties and represents the market
targeted by FLOSEAL. In the U.S. FLOSEAL is indicated for all surgical
specialties except neurosurgical, ophthalmic, and urological. During our
marketing research, we asked surgeons for the percent of their cases where
bleeding control was an issue. We found fifty percent of the initially targeted
market for FloSeal was composed of three surgical specialties: cardiac,
vascular, and spinal. Thus, we decided to focus our marketing efforts on these
three specialties.
To address the three vital markets: cardiac, vascular, and spinal, we have
implemented a hybrid sales strategy. To address the cardiac and vascular
surgical specialties in the U.S., we have built a direct sales force. We
identified the top fifteen geographic areas in the U.S. with the highest
incidence of cardiac and vascular procedures. Beginning in the summer of 1999,
we began hiring sales professionals in these top markets. Today, our direct
sales force services fourteen of these areas.
To address the spinal and cranial surgical specialty markets, we entered
into a world wide distribution agreement with Sulzer Spine-Tech in July 1999.
Sulzer Spine-Tech is a subsidiary of Sulzer Medica Ltd., a US$906 million
company headquartered in Switzerland. Sulzer Spine-Tech has an established U.S.
sales force of approximately 120 persons with relationships with most hospitals
conducting spinal and nuerosurgical surgeries. The distribution agreement with
Sulzer Spine-Tech grants the distribution rights to the product configuration of
FLOSEAL, called Proceed(TM) Hemostatic Sealant (Proceed), for use in spinal and
cranial surgeries in all world wide markets except for Japan and a few other
small markets where we already had distributor relationships in place. The
agreement extends through 2002 and contains provisions for both annual renewal
and termination in the event of change in control.
To address the cardiac and vascular surgical specialty markets in Europe,
we are selling through regional distributors. FLOSEAL receive CE Mark clearance
to allow marketing in Europe in April 1999. We have relationships with
distributors in Switzerland, Germany, The Netherlands, Sweden, Austria, Italy,
Spain, the United Kingdom, Belgium, Denmark, and Finland. The regional
distributors maintain small inventories of FloSeal.
We believe this hybrid sales and marketing strategy will enable us to
quickly penetrate the three vital markets and rapidly grow sales volume over
time.
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TARGET MARKET
Our domestic and international commercialization efforts are focusing
initially on those surgeons who perform cardiac, vascular and spinal procedures,
the specialties studied in the clinical trial. These first three markets
comprise approximately 45% of the total initial market. There are approximately
500,000 cardiac surgeries, 400,000 vascular surgeries and 400,000 spinal
surgeries performed annually in the United States. We believe FLOSEAL could be
used in approximately 15% of cardiac surgeries, 50% of vascular surgeries and
60% of spinal surgeries. We believe the potential market for FLOSEAL outside of
the United States with respect to each of those surgical specialties is roughly
equal to the corresponding market within the United States. Finally, we believe
FLOSEAL will be a useful hemostat for other types of surgery, including
non-spinal orthopedic, trauma, gynecologic, plastic and other general surgery.
Marketing FLOSEAL in the U.S. for use in neurosurgical, urologic and ophthalmic
surgical specialities will require approvals by FDA, which cannot be guaranteed.
FUSION'S PRODUCTS
The technology underlying FloSeal and our other products currently under
development consists of a mixture of a proprietary gel derived collagen and
thrombin, a blood clotting agent. When mixed, the thrombin coats the gel, and
they act synergistically to stop bleeding. The granular nature of the gel allows
it to conform to irregular wound geometries. We have engineered the collagen
granules to swell upon contact with the blood. By swelling, the granules
restrict blood flow. Blood percolates through the spaces between the granules
and is exposed to high concentrations of thrombin, thereby accelerating
formation of a mechanically stable clot.
FLOSEAL
FLOSEAL, our lead product, is designed to control bleeding in various types
of surgery and has received a Premarket Approval from FDA on December 8, 1999.
In April 1999, we received CE Mark Certification in Europe allowing sales and
marketing activities to begin in most countries in Europe.
CLINICAL DEVELOPMENT. In November 1998, we completed enrollment in a
ten-center, randomized clinical trial of FLOSEAL involving 309 patients who
underwent cardiac, vascular or spinal surgery. One hundred fifty-six patients
were treated with FLOSEAL while 153 patients were treated with Gelfoam plus
thrombin. At the time the study began, Gelfoam plus thrombin was seen as the
standard of treatment The degree of intraoperative bleeding treated during the
trial ranged from lighter "oozing" to heavier "flowing" and "spurting," with
nearly one-third (32%) of the patients experiencing bleeding in the heavier,
more difficult to control ranges.
The primary endpoint of the trial was to show FLOSEAL, in the combined
surgical procedures, stopped bleeding within 10 minutes of application at least
as frequently as the Gelfoam plus thrombin control. FLOSEAL stopped bleeding
within 10 minutes in 96% of the 156 patients treated with FLOSEAL, whereas
Gelfoam plus thrombin stopped bleeding within ten minutes in 77% of the 153
patients in the control group. In addition, a subset analysis of patients
treated demonstrated FLOSEAL stopped bleeding at least two times faster than
Gelfoam plus thrombin. These results were consistent across all tested surgical
specialties and bleeding classes, from simple oozing to active arterial
spurting.
Ninety-three patients underwent cardiac surgery, the most difficult group
to treat due to the use of cardiopulmonary bypass and high levels of
anti-coagulant drugs. FLOSEAL stopped bleeding within ten minutes in 94% of the
48 patients treated with FLOSEAL, whereas Gelfoam plus thrombin stopped bleeding
within ten minutes in 60% of the 45 patients in the control group. In cases of
heavy cardiac bleeding, FLOSEAL stopped bleeding within three minutes in 77% of
patients, as compared to 0% for those treated with Gelfoam plus thrombin.
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In the trial, 89 patients underwent vascular surgery. FLOSEAL stopped
bleeding within ten minutes in 93% of the 43 patients treated with FLOSEAL,
versus 76% for the 46 control group patients. One hundred twenty-seven patients
underwent spinal surgery. FLOSEAL stopped bleeding within ten minutes in 98% of
the 65 patients treated with FLOSEAL, versus 90% for the 62 control group
patients. Results for the clinical trial as a whole and each of the cardiac,
vascular and spinal arms of the trial have been presented as abstracts at
various medical conferences. The cardiac arm has been accepted for publication
in the Annals of Thoracic Surgery. We anticipate additional publications in
peer-reviewed medical journals in the future.
The primary endpoint of the trial was achieved. In addition, subset
analysis of secondary endpoints showed statistically significant and clinically
meaningful benefit of FLOSEAL relative to Gelfoam plus thrombin. The following
chart summarizes certain data with respect to the trial results:
SUMMARY CLINICAL TRIAL RESULTS
<TABLE>
<CAPTION>
Hemostasis Hemostasis
within 10 minutes within 3 minutes
--------------------- --------------------
GELFOAM GELFOAM
PATIENT CATEGORY FLOSEAL +THROMBIN FLOSEAL +THROMBIN
- ---------------- ------- --------- ------- ---------
<S> <C> <C> <C> <C>
All patients 96% 77% 84% 47%
All vascular 93% 76% 79% 39%
All spinal 98% 90% * *
All cardiac patients 94% 60% 69% 22%
Cardiac: "Oozing" 94% 66% 66% 29%
Cardiac: "Flowing" or "Spurting" 92% 40% 77% 0%
* Data not yet released and subject to publication in a peer reviewed medical journal.
</TABLE>
FLOSEAL FOR ENT
We are developing a configuration of FLOSEAL for use by ear, nose and
throat (ENT) surgeons to control bleeding. This configuration is delivered
through a standard disposable syringe with a sinus applicator tip, and consists
of the same FLOSEAL tested in the clinical trial described above. At the close
of sinus surgeries, conventional packing materials, such as gauze strips or
plugs are often inserted into the nose and left in place for several days.
Removal of these packing materials requires a return visit to the surgeon's
office, is generally painful and often results in re-bleeding. FLOSEAL, however,
is absorbed by the body and consequently does not require removal. We believe
FLOSEAL will eliminate much of the discomfort, pain and cost associated with
nasal packing.
In 1998, we completed a three-center evaluation of 18 patients in Canada in
which FLOSEAL controlled intra-operative bleeding during sinus surgery in 100%
of 29 application sites. We intend to commercialize the ENT configuration of
FLOSEAL in the second half of 2000.
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We expect our domestic and international commercialization efforts to focus
on ENT surgeons. Industry sources estimate approximately 875,000 ENT surgeries
are performed annually in the United States. ENT surgeries include sinus
surgery, tonsillectomies and adenoidectomies. We estimate approximately 50% of
these ENT procedures could benefit from the use of this configuration of
FLOSEAL.
FEMORAL ARTERY CLOSURE DEVICE
We are also developing a device to close femoral artery punctures following
catheterization procedures. This device is an additional application of our
FLOSEAL technology. The femoral artery closure device is designed to be used by
interventionalists to seal arterial punctures of the femoral artery following
vascular interventional procedures, such as balloon angioplasty or angiography.
The device incorporates a proprietary catheter-based applicator to easily
deliver to the site of the arterial puncture the same FLOSEAL tested in the
clinical trial described above. Currently available suturing devices and
collagen plugs can be costly, difficult to use and may require extensive doctor
training prior to use. We are designing the femoral artery closure device to
address these limitations.
We have conducted preliminary pre-clinical studies examining the safety and
effectiveness of the femoral artery closure device. We plan to begin a pilot
clinical trial before the end 2000. This device is in early stages of
development. To begin clinical trails and to market the device requires FDA
approval, which cannot be guaranteed. Industry sources estimate approximately
3.3 million arterial puncture closure procedures, including therapeutic and
diagnostic procedures, are performed annually in the United States in 1999.
FLOSEAL SPONGE
The FLOSEAL sponge is a ready-to-use formulation of the FLOSEAL technology.
While the current FLOSEAL product requires the FLOSEAL gelatin granules to be
mixed with the FLOSEAL thrombin component prior to application, the FLOSEAL
sponge would be packaged in a pre-mixed, dry formulation. A gelatin
superstructure dissolves very quickly upon contact with a bleeding wound leaving
active FLOSEAL at the bleeding site. In laboratory tests, the FLOSEAL sponge has
been shown to stop bleeding as effectively as the current FLOSEAL product.
The FLOSEAL sponge will be used in trauma, ambulance and battlefield
applications where loss of blood often leads to patient death prior to receiving
necessary medical attention. Discussion with FDA regarding specific regulatory
requirements are planned to take place in the first half of 2000.
The statements we have made above regarding the anticipated
commercialization of products in our pipeline are forward looking. We are not
permitted to commercialize any of the above products unless and until we receive
necessary regulatory approvals.
RESEARCH AND DEVELOPMENT
Our research and development activities are focused on enhancing and
expanding the applications of the FLOSEAL technology platform. We have
established an active dialogue with surgeons to ascertain the most desirable
additional applications and enhancements for the FLOSEAL technology.
MANUFACTURING
Our manufacturing operations are located in our 13,200 square foot
headquarters in Mountain View, California. We have maximized our manufacturing
capacity within this facility. We believe our current manufacturing capacity
will be sufficient through the end of 2000. In January 2000, we began
improvements on
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an additional 72,500 square foot facility in Fremont, California. The
Fremont facility will become our corporate headquarters. We believe the
additional capacity of the Fremont facility should be sufficient through 2004.
In conjunction with the new facility, we anticipate spending a total of
approximately $2.2 million for the purchase of production equipment, leasehold
improvements and office furnishings and equipment. We are exploring proposals
for capital lease financing to support this expansion.
Our manufacturing facilities are subject to the FDA's Quality System
Regulation, international quality standards and other regulatory requirements.
Difficulties we encounter in manufacturing scale-up or our failure to implement
and maintain our facilities in accordance with quality standards or other
regulatory requirements could lead to a delay or termination of production,
which would materially and adversely affect our business. We have received a
manufacturing license from the California Department of Health Services.
However, we have no experience manufacturing our products in the volumes
necessary to achieve significant commercial sales, and there can be no assurance
that such manufacturing can be achieved at a commercially reasonable cost. If we
encounter any manufacturing difficulties involving capacity constraints,
production yields, quality control and assurance, supplies of components or
shortages of qualified personnel our business could be materially and adversely
affected. There can be no assurance that we will be able to manufacture
sufficient quantities of products to meet supply requirements for
commercialization and continued clinical trials in the United States and abroad.
Fusion acquires raw materials and product components from suppliers,
processes the raw materials internally to the appropriate form and composition,
packages kits, arranges for sterilization by a third party and then packages the
products for shipment. We acquire some raw materials and components, such as
bovine hides and thrombin, all of which are essential components of FLOSEAL, and
sterilization services from single suppliers. Generally, we believe there are
additional and alternative suppliers of equivalent materials available and we
could supplement and substitute suppliers with minimal business and regulatory
consequences. However, there can be no assurance that such supplies will be
available or such substitutions could be made in a timely manner, on
commercially reasonable terms, if at all. In the event any of our current single
source suppliers become unable to meet our needs or we lose them as a supply
source for some other reason, our business could be disrupted and materially and
adversely affected.
COMPETITION
The market for topical hemostats is highly competitive. A wide variety of
existing products and products under development may compete directly with
FLOSEAL and our other products under development. Many existing and potential
competitors have greater name recognition, broader product lines, greater
distribution capabilities, substantially greater capital resources and larger
marketing research and development staffs and facilities. Broad product lines
may give competitors the ability to negotiate exclusive, long-term supply
contracts and, as a result, the ability to offer comprehensive pricing for their
products. With a broader product line, competitors may also have a significant
advantage in marketing competing products to group purchasing organizations and
other managed care organizations that increasingly seek to reduce costs through
centralized purchasing. There can be no assurance we will be able to
successfully compete against competitors or potential competitors. In addition,
we cannot be certain current competitors or other companies will not succeed in
developing technologies and products more effective or that would render our
technology or products obsolete or unable to compete.
PATENTS AND PROPRIETARY RIGHTS
Our ability to compete effectively depends in part on our ability to
develop and maintain the proprietary aspects of our technology. We have two
issued patents and four pending U.S. patent applications relating to FLOSEAL. We
also have ten issued U.S. patents and three pending U.S. patent applications
relating to other products under development and other technologies invented by
our research department. We also have filed two
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corresponding patent applications with the European Patent and Trademark
Commission and may file additional patent applications outside the United States
at a later date. In addition, we have in-licensed technology that we believe
strengthens our patent portfolio.
Our patent applications may not result in issued patents. We have conducted
searches to determine whether our patent applications interfere with existing
patents. Based upon these searches, we believe our patent applications and
products do not interfere with existing patents. However, we cannot be sure
relevant patents have not been issued that could block our ability to obtain
patents or commercialize our products. Moreover, since U.S. patent applications
are not a matter of public record, a patent application could currently be on
file that would stand in the way of us obtaining an issued patent. A number of
medical device and other companies, universities and research institutions have
filed patent applications or have issued patents relating to compositions and
methods for surgical sealing, which could materially impact our operations.
Obtaining foreign patents may be more difficult than obtaining domestic patents
because of differences in patent laws. Protection provided by foreign patents,
if obtained, and any other foreign intellectual property protection may be
weaker than that provided domestically.
The medical device industry is characterized by extensive litigation
regarding patents and other intellectual property rights. Many medical device
companies have employed intellectual property litigation as a way to gain a
competitive advantage. There is no assurance that we will not be sued in the
future challenging our patent rights or claiming infringement on patents held by
third parties. An adverse determination in litigation or interference
proceedings to which we may become a party could subject us to significant
liabilities to third parties, require us to license disputed rights from third
parties or require us to cease using the disputed technology. Although patent
and intellectual property disputes in the medical device area are often settled
through licensing or similar arrangements, costs associated with these
arrangements may be substantial and could include ongoing royalties.
Furthermore, we cannot be certain that the necessary licenses would be available
to us on satisfactory terms, if at all.
GOVERNMENT REGULATION
UNITED STATES
FLOSEAL, our proposed products and research and development activities are
subject to regulation by the FDA and other regulatory bodies. FDA regulations,
govern, among other things, the following activities:
o Product development,
o Product testing,
o Product labeling,
o Product storage,
o Premarket clearance or approval,
o Advertising and promotion, and
o Product sales and distribution.
Product development and approval can take a number of years and can be
expensive and uncertain.
In the United States, medical devices are classified on the basis of
controls deemed necessary to reasonably ensure the safety and effectiveness of
the device. Class I devices are subject to general controls. These controls
include labeling, premarket notification and adherence to the FDA's Quality
System Regulation. Class II devices are subject to general and special
controls. Special controls include performance standards, postmarket
surveillance, patient registries, and FDA guidelines. Class III devices are
those which must receive premarket approval by the FDA to ensure their safety
and effectiveness.
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Premarket notification clearance must be obtained for class I and II
devices and class III devices when the FDA has not called for premarket
approval. A premarket approval application is required for most class III
devices. A premarket approval application must be supported by valid scientific
evidence to demonstrate the safety and effectiveness of the device. The
application typically includes:
o Results of bench and laboratory tests, animal studies, and clinical
studies
o A complete description of the device and its components,
o A detailed description of the methods, facilities and controls used
to manufacture the device, and
o Proposed labeling, advertising literature.
The approval process can be expensive, uncertain and lengthy. A number of
devices for which FDA approval has been sought by other companies have never
been approved f or marketing.
FDA REVIEW PROCESS. When the FDA receives a premarket approval application,
it will determine whether the application is complete enough for review. If the
application is complete, the application is filed and the FDA begins an in-depth
review. Currently, FDA review time is approximately 12 months, but timing is
uncertain and the process may take significantly longer. The review time is
often extended by the FDA asking for more information or clarification of
information already provided in the submission. An advisory committee may be
convened to review and evaluate the application and provide a recommendation to
the FDA as to whether the device should be approved. The FDA gives substantial
weight to the recommendation but is not bound by it. Before the approval, FDA
generally will conduct an inspection of the manufacturer's facilities to ensure
compliance with applicable Quality System requirements. The FDA conducted a
preapproval inspection, which we passed, of our facilities in Mountain View
during the fourth quarter of 1999.
The FDA may issue either an approval letter or an approvable letter. An
approvable letter will contain a number of conditions that must be met in order
to secure final approval. When and if those conditions are met, an approval
letter will be issued. The FDA can also deny approval or issue a "complete
action" letter that will detail the deficiencies.
The FDA may determine that additional clinical trials are necessary. This
may delay approval for one or more years while additional clinical trials are
conducted and submitted. Any additional information must be submitted in an
amendment to the application. Certain modifications to the device, labeling or
manufacturing process may require premarket approval or approval of a supplement
to a premarket approval. Premarket approval supplements often require the
submission of information only needed to support the proposed change.
CLINICAL STUDIES. If clinical trials involve a "significant risk," the
sponser of the trail must file an Investigational Device Exemption (IDE)
application prior to commencing the study. The FDA must approve the clinical
trial before the study may commence. If the device presents a "non-significant
risk" to the patient, the clinical trial may commence without FDA approval.
Institutional Review Board (IRB) approval must be obtained for all studies.
Submission of an IDE application does not give assurance that the FDA will
approve the application. If the application is approved, there can be no
assurance that FDA will determine that data derived from the studies will
support the safety and efficacy of the device. An IDE supplement must be
approved by the FDA before a sponsor or investigator may make a significant
change to the investigational plan.
The FDA determined FLOSEAL would be regulated as a class III medical
device. A premarket approval was obtained from FDA for FLOSEAL on December 8,
1999. Thus, FLOSEAL can be marketed in the United States. Additional IDEs, PMAs
or PMA supplements may be required for other applications of FLOSEAL, e.g. the
configuration of FLOSEAL for ENT, the femoral artery closure device and the
FLOSEAL sponge. There can be no assurance a supplemental PMA application will be
accepted for our additional products. In the event we are unable to file a PMA
supplement for our additional products, we will be required to file PMA
applications.
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MANUFACTURING. Manufacture and distribution of FLOSEAL will be subject to
continuing regulation by the FDA. We will also be subject to routine inspections
by the FDA to determine compliance with the following:
o Quality System requirements,
o Medical Device Reporting regulations, and
o FDA's restrictions on promoting products for unapproved or
"off-label" uses.
INTERNATIONAL
To market products in Europe and other foreign countries, we must obtain
similar regulatory approvals. Regulations vary significantly from country to
country. The time required to obtain approval to market products may be longer
or shorter than that required in the United States. Fusion obtained CE mark
certification to market FLOSEAL in member countries of the European Union. CE
mark certification is an international symbol of adherence to quality assurance
standards and compliance with the applicable European Medical Device
Directives. In February 1997, we received ISO 9001 and EN 46001 qualification of
our processes, which is one of the principal steps in the CE mark approval
process. There can be no assurance we will be successful in completing the CE
mark certification process or obtaining CE mark certification in a timely manner
for our additional FLOSEAL products.
EMPLOYEES
As of December 31, 1999, we had 61 employees, thirteen of whom were engaged
in research and development, six in regulatory affairs and quality assurance,
twenty-two in operations, two in marketing, eleven in sales and seven in finance
and administration. No employees are covered by collective bargaining
agreements, and we believe we maintain good relations with our employees.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to our
executive officers as of December 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------- --- ------------------------------------------
<S> <C> <C>
Philip M. Sawyer 35 President, Chief Executive Officer, and
Director
Debera M. Brown 47 Vice President, Regulatory Affairs and
Quality Assurance
Christopher S. Dauer 36 Vice President, Marketing, North America
Dan S. Ellis 48 Vice President, Sales
Scott Huie 41 Vice President, Operations
Cary J. Reich, Ph.D. 51 Vice President, Research
Joseph F. Rondinone, Ph.D. 52 Vice President, Development
Larry J. Strauss 47 Vice President, Finance and Chief
Financial Officer
</TABLE>
MR. SAWYER, a founder of the Company, has served as President and Chief
Executive Officer and as a Director since April 1993. From 1991 to 1993, Mr.
Sawyer worked in various positions in sales and marketing at the Stryker
Corporation. From 1987 to 1989, Mr. Sawyer worked at Patricof & Co. Ventures
Inc. From 1986 to
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<PAGE>
1987, Mr. Sawyer worked in the health care corporate finance group at E.F.
Hutton and Co. Mr. Sawyer holds a B.A. from Haverford College and an M.B.A. from
the Harvard Business School.
MS. BROWN joined the Company in May 1995 as Vice President, Regulatory and
Clinical Affairs, which position she held until July 1997. Since July 1997, Ms.
Brown has been Vice President, Regulatory Affairs and Quality Assurance. From
September 1990 to March 1995, Ms. Brown was Vice President, Medical and
Regulatory Affairs, at Celtrix Pharmaceuticals, Inc., a manufacturer of
biopharmaceutical products from recombinant proteins. At Celtrix, Mrs. Brown was
responsible for overseeing the actions of staff for the Regulatory Affairs
Department, the Quality Assurance Department and clinical trials. Ms. Brown
holds a B.A. in Human Biology from Stanford University and completed the
Executive Program at Stanford University School of Business.
MR. DAUER joined the Company in August 1996 as Director, U.S. Marketing and
has been instrumental in product and marketing strategies from product
development to the commercialization of FloSeal. In March 2000, Mr. Dauer was
promoted to Vice President, Marketing, North America and will have primary
responsibilities for U.S. marketing strategy and coordination for PROCEED and
development of spinal and cranial markets. Prior to 1996, Mr. Dauer held various
positions in finance, marketing and international sales with Guidant
Corporation's Vascular Invention division, including managing the European
launch of the Multi-Link(R) stent. Mr. Dauer holds a B.A. degree, magna cum
laude, in Economics and History from Brown University and earned an M.B.A. from
Stanford University.
MR. ELLIS rejoined the Company in June 1999 as Vice President, Sales. From
January 1998 to June 1999, Mr. Ellis served as Vice President Sales & Marketing
at Cardiac Pathways. Prior to Cardiac Pathways, Mr. Ellis was Director of North
American Sales with Fusion. From 1987 to 1996, Mr. Ellis held senior sales and
marketing positions with Guidant Corporation and Advanced Cardiovascular Systems
Inc, successfully launching multiple products and building sales and
distribution channels. Mr. Ellis holds a B.S of Business Administration from
Oregon State University.
MR. HUIE joined the Company in August 1997 as Vice President, Operations.
From May 1995 to August 1997, Mr. Huie was Director of Pharmaceutical
Engineering at Aradigm Corporation, a pharmaceutical and medical device company
specializing in non-invasive aerosol drug delivery. He directed process
development, scale up, clinical supplies and facilities. From February 1993 to
May 1995, Mr. Huie was Director of Engineering at Cygnus, Inc., ("Cygnus") a
manufacturer of transdermal drug delivery systems and developer of a non-
invasive glucose monitoring medical device. As Director of Engineering Mr. Huie
was responsible for all engineering functions in the company including process
engineering, clinical manufacturing, manufacturing engineering, maintenance and
validation. Mr. Huie holds a B.S. in Chemical Engineering from Rensselaer
Polytechnic Institute.
DR. REICH joined the Company in May 1995 as Vice President, Research and
Development. Dr. Reich's current position is Vice President, Research. >From
June 1987 to May 1995, Dr. Reich held various positions at Chiron Vision, a
manufacturer of devices and pharmaceuticals to correct, improve and restore
vision. His most recent position at Chiron Vision, which he held from April 1993
to May 1995, was Vice President, Research and Development. As Vice President,
Research and Development, Dr. Reich was responsible for global research and
development efforts in the field of ophthalmic medical devices. Dr. Reich holds
a B.S. in Chemistry from Harvey Mudd College and a Ph.D. in Physical Organic
Chemistry from Stanford University.
DR. RONDINONE joined the Company in January 1996 as Director of Clinical
Affairs. In July 1997, Dr. Rondinone was promoted to Vice President,
Development. From July 1992 to January 1996, Dr. Rondinone was Vice President,
Research and Development, for LaserScope Surgical Systems, Inc., a manufacturer
and world-wide distributor of surgical lasers and instruments. At LaserScope,
Dr. Rondinone was responsible for new product development and management of the
research and development department. Dr. Rondinone holds a B.S. in Biology from
Tufts University, an M.S. from University of California at Los Angeles and a
Ph.D. in physics
14
<PAGE>
from the University of California at Los Angeles.
MR. STRAUSS joined the company in June 1999 as Vice President, Finance and
Chief Financial Officer. From February 1996 to May 1999, Mr. Strauss held
various positions at CardioGenesis Corporation, currently a subsidiary of
Eclipse Surgical Technologies, Inc, a manufacturer of proprietary systems to
treat patients suffering from angina. At CardioGensis, he served as Corporate
Controller and most recently as Vice President, Operations. From 1991 through
1995, Mr. Strauss was Director of Finance and Administration at Telik, Inc., a
biotechnology drug discovery company. Mr. Strauss received a B.S. in Mathematics
graduating cum laude from Claremont Men's College and earned an M.S. degree in
Industrial Engineering and Operations Research from University of California,
Berkeley.
RISK FACTORS
THE FOLLOWING FACTORS REPRESENT SOME OF OUR CHALLENGES WHICH CREATE RISK
AND UNCERTAINTY. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY
AFFECTED. THIS FORM 10-K ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES.
WE DID NOT GENERATE ANY REVENUES IN 1998 AND ONLY MODEST REVENUES IN 1999.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES TO CONTINUE IN THE FUTURE.
We did not generate any revenues in 1998 and generated only $254,000 in
revenues in 1999. We have a history of losses and we expect losses to continue
in the future. We have not achieved, nor do we expect to achieve, profitability
before 2001. We incurred net losses of $8.3 million, $7.7 million and $9.9
million for the years ended December 31, 1999, 1998 and 1997, respectively. As
of December 31, 1999, we had an accumulated deficit of $37.6 million. We have
not had significant revenues in any period since our inception. We expect to
increase our operating expenses in the near future, including sales and
marketing, manufacturing and research and development expenses, as we approach
U.S. commercialization of FLOSEAL and continue development of our other
products. As a result, we will need to generate significant revenues to achieve
and maintain profitability. The amount of future net losses and the time
required to achieve profitability are highly uncertain. If we do achieve
profitability in any period, we cannot be certain that we will sustain or
increase such profitability on a quarterly or annual basis.
IF WE DO NOT SUCCESSFULLY COMMERCIALIZE FLOSEAL, OUR BUSINESS WILL SUFFER.
We are dependent upon the success of our lead product, FLOSEAL. We received
the necessary regulatory approval for the commercial sale of FLOSEAL in the
United States on December 8, 1999. We received the European CE mark on April 20,
1999 and have begun to export FLOSEAL to Europe. Our success after regulatory
approval, if any, will depend on the medical community's acceptance of FLOSEAl
and our ability to successfully scale up commercial manufacturing and develop an
effective sales, marketing and distribution capability. We cannot predict how
quickly, if at all, the medical community will accept FLOSEAL, or if accepted,
the extent of its use. A surgeon's use of FLOSEAL will require the surgeon to
change from his or her usage of more familiar currently available products. For
FLOSEAL to achieve market acceptance, it will have to be priced competitively
and offer clinically significant advantages over other commercially available
products. Even if the market generally accepts FLOSEAL, surgeons may choose to
use it in fewer procedures than projected. If FLOSEAL does not achieve
significant market adoption, our business will be materially and adversely
affected.
SIGNIFICANT INCREASES IN OPERATING EXPENSES IN THE FUTURE MAY ADVERSELY
AFFECT OUR OPERATING RESULTS AND FINANCIAL CONDITION.
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<PAGE>
We plan to significantly increase our operating expenses to expand our
sales and marketing operations and broaden our customer support capabilities as
we continue commercial introduction of FLOSEAL and fund greater levels of
product development. Our operating expenses, which include sales and marketing,
research and development and general and administrative expenses, are based on
our expectations of future revenues and are relatively fixed in the short term.
If revenues fall below our expectations, we will not be able to quickly reduce
our spending in response, which would materially adversely affect our operating
results and financial condition.
OUR LIMITED OPERATING HISTORY AND LACK OF EXPERIENCE IN MANUFACTURING AND
MARKETING FLOSEAL MAY RESULT IN SIGNIFICANT FLUCTUATIONS OF OUR FINANCIAL
RESULTS.
Our limited operating history, dependence upon FLOSEAL to provide future
revenue and our lack of experience in manufacturing and marketing FLOSEAL in
commercial quantities may likely cause our operating results to fluctuate
dramatically. As a result of these fluctuations and uncertainties in our
operating results, we believe quarter-to-quarter or annual comparisons of our
operating results are not a good indication of our future performance. In
addition at some point in the future, these fluctuations may likely cause us to
perform below the expectations of public market analysts and investors. If our
results were to fall below market expectations, the price of our common stock
would likely fall. Our limited operating results have varied widely in the past,
and we expect they will continue to vary significantly from quarter-to-quarter
as we attempt to commercially produce and establish our
products in the market.
WE MAY NEED TO RAISE ADDITIONAL MONEY BEFORE WE EXPECT TO ACHIEVE PROFITABILITY.
IF WE FAIL TO RAISE ANY SUCH NEEDED ADDITIONAL MONEY, OUR BUSINESS WILL SUFFER.
We received net proceeds of approximately $15.8 Million in 1999 from the public
and private offering of common stock. Our current cash and cash equivalents and
available for sale securities should be sufficient to fund our planned
operations into 2001. We may need to raise additional funds in order to be
successful. Future financing strategies may include, but are not limited to:
o partnering relationships with larger medical device companies,
o bank facilities, or
o debt or additional equity offerings.
If we are unable to raise additional funds when needed, we may not be able
to market FLOSEAL as planned, or continue development of our other products,
which would materially and adversely affect our business.
ADDITIONAL FUNDING MAY NOT BE AVAILABLE TO US OR, IF AVAILABLE, MAY NOT BE
AVAILABLE ON COMMERCIALLY REASONABLE TERMS.
If we need to raise additional money to fund our operations, we cannot be
certain that funding from any source will be available to us on acceptable
terms, or at all. The amount and the timing of raising additional funds will
depend primarily upon our ability to generate revenues from the sale of FLOSEAL.
Our inability to obtain any needed additional funding on reasonable terms will
materially and adversely affect our business.
WE MAY HAVE TO INCUR SIGNIFICANT COSTS IN MAINTAINING COMPLIANCE WITH
REGULATIONS GOVERNING OUR MANUFACTURING OPERATIONS.
We are also required to maintain compliance with the good manufacturing
practice requirements for medical devices incorporated into the FDA's Quality
System Regulation ("QSR") following approval of FLOSEAL The QSR is similar to
good manufacturing practices and relate to product testing and quality
assurance, as well as the maintenance of records and documentation. The FDA
enforces the QSR through periodic post-approval inspections. We can provide no
assurance we will be able to maintain compliance on an ongoing basis. If we or
16
<PAGE>
any third party manufacturer of our products does not conform to the QSR and
cannot be brought up to such a standard, we will be required to find alternative
manufacturers that do conform. This may be a long and difficult process. Those
manufacturers must be approved by the FDA before they can commercially
manufacture our products. We may have to incur significant costs to comply with
such laws and regulations and our failure to comply with them could lead to
penalties that could have a material and adverse affect on our business.
INTERNATIONAL SALE OF OUR PRODUCTS WILL ALSO BE SUBJECT TO EXTENSIVE
REGULATION.
Marketing of FLOSEAL in jurisdictions outside of the U.S. requires
compliance with additional local regulations. We cannot guarantee we will be
able to comply with such local regulations and thus cannot guarantee that we
will be allowed to sell FLOSEAL to any or all of these markets.
IF WE FAIL TO MAINTAIN REGULATORY APPROVALS AFTER FLOSEAL IS COMMERCIALIZED, OUR
BUSINESS WILL SUFFER.
Following regulatory approval of FLOSEAL, we continue to be subject to
extensive regulatory requirements. These regulations are wide-ranging and
govern, among other things:
o product changes or modifications,
o product manufacturing,
o Quality System requirements,
o Medical Device Reporting regulations,
o FDA's restrictions on promoting products for unapproved, off-label
uses, and
o product sales and distribution.
If we fail to comply or maintain compliance with medical device laws or
regulations, we may be fined and barred from selling our products. If the FDA
believes that we are not in compliance with the law, it can:
o detain or seize our products,
o issue a recall,
o enjoin future violations, and
o assess civil and criminal penalties against us.
Our failure to comply with regulatory requirements could have a material
adverse effect on our business. Regulations are also subject to change. We
cannot predict the effect, if any, that such changes might have on our business.
OUR ABILITY TO ACHIEVE ANY SIGNIFICANT REVENUE WILL DEPEND ON OUR ABILITY TO
ESTABLISH EFFECTIVE SALES, MARKETING AND DISTRIBUTION CAPABILITIES.
If we fail to establish a sufficient marketing and distribution or direct
sales force to commercialize FLOSEAL or any of our other products, our ability
to enter new or existing markets will be impaired. Our inability to effectively
enter these markets would materially and adversely affect our business. The
alternatives for selling our products are:
o our own direct sales force,
o distribution agreements,
o collaborative arrangements with corporate strategic partners.
17
<PAGE>
Although we entered into a multiyear distribution agreement with Sulzer
Spine-Tech, Inc. in June 1999, we cannot be certain we will be able to enter
into additional distribution agreements or collaborative arrangements on a
timely basis or at all, or that these relationships will be successful. We have
only limited experience in establishing and managing a direct sales force, from
selling the RAPISEAL patch, a discontinued product line, and we cannot be
certain we can establish and manage a direct sales force for FLOSEAL. Our
ability to achieve any significant revenue will depend heavily upon our success
in establishing effective sales and market capabilities, through a combination
of distribution or collaboration arrangements and a direct sales force.
WE MAY BE UNABLE TO EFFECTIVELY COMMERCIALIZE FLOSEAL BECAUSE THE MARKET FOR
SURGICAL BLEEDING CONTROL PRODUCTS IS HIGHLY COMPETITIVE.
The market for products that control surgical bleeding is highly
competitive. A wide variety of approved products such as Gelfoam plus thrombin
and fibrin glues, exist today and will compete directly with FLOSEAL. Many
competitive products are produced by companies that have competitive advantages
over us, such as:
o greater name recognition,
o broader product lines,
o greater distribution capabilities,
o substantially greater capital resources, and
o larger marketing, research and development staffs and facilities.
Such competitors include Pharmacia & Upjohn AB, Baxter Healthcare
Corporation and Johnson & Johnson. We cannot be certain FLOSEAL or our other
products will be able to successfully compete against these products and
companies, or any other companies which may enter the marketplace. In addition,
we cannot be certain that current competitors or other companies will not
succeed in developing technologies and other products that are more effective or
that would render our technology or products obsolete or unable to compete.
WE HAVE TWO ISSUED PATENTS AND FOUR PENDING PATENT APPLICATIONS RELATED TO THE
FLOSEAL TECHNOLOGY. OUR FAILURE TO OBTAIN ADDITIONAL ISSUED PATENTS AND,
CONSEQUENTLY, TO PROTECT OUR PROPRIETARY TECHNOLOGY, COULD IMPAIR OUR
COMPETITIVE POSITION.
We regard elements of FLOSEAL as proprietary and we attempt to protect them
through patent and trade secret laws and restrictions, as well as licenses and
contractual confidentiality provisions. Any steps we take to protect our
intellectual property may be inadequate and expensive. Despite our efforts, we
may be unable to prevent third parties from infringing upon or misappropriating
our intellectual property. We have two issued U.S. patents and four pending U.S.
patent applications relating to FLOSEAL. We also have ten issued U.S. patents
and three pending U.S. patent applications relating to other products under
development and other technologies invented by our research department. We also
have two corresponding international patent applications filed under the Patent
Cooperation Treaty and may file additional patent applications outside the
United States at a later date. Obtaining foreign patents may be more difficult
than obtaining U.S. patents because of differences in patent laws. Protection
provided by foreign patents, if obtained, and any other foreign intellectual
property protection may be weaker than provided domestically. Any existing or
new patent applications, domestic or international, may not result in:
o the priority of our patent applications over others' applications or
issued patents,
o the issuance of any patents, or
o any competitive advantage.
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<PAGE>
Furthermore, our competitors may independently develop similar technology
in the future that substantially limits the value of our intellectual property.
WE MAY NOT BE ABLE TO COMMERCIALIZE FLOSEAL OR OUR OTHER PRODUCTS UNDER
DEVELOPMENT IF THEY INFRINGE EXISTING PATENTS OR PATENTS THAT HAVE NOT YET
ISSUED, WHICH WOULD MATERIALLY HARM OUR BUSINESS.
We have conducted searches to determine whether our patent applications
interfere with existing patents. Based upon these searches, we believe that our
patent applications and products do not interfere with existing patents.
However, we cannot be sure that relevant patents have not been issued that could
block our ability to obtain patents or commercialize our products. Moreover,
since U.S. patent applications are not a matter of public record, a patent
application could currently be on file that would stand in our way of obtaining
an issued patent. In addition, a number of medical device and other companies,
universities and research institutions have filed patent applications or have
issued patents relating to compositions and methods for surgical sealing. The
issuance of any of these potentially competing patents could materially and
adversely affect our business.
IF WE DO NOT OBTAIN FDA APPROVAL, WE CANNOT SELL ADDITIONAL CONFIGURATIONS OF
FLOSEAL IN THE UNITED STATES, WHICH WOULD SIGNIFICANTLY HARM OUR BUSINESS.
FLOSEAL is regulated through the Center for Devices and Radiological
Health, a division of the FDA, and, as such will be subject to extensive
regulation in the United States. Before we can market additional configurations
of FLOSEAL or any of our other products under development in the United States,
we must show in clinical trials our products are safe and effective, and obtain
approval from the FDA, which cannot be guaranteed.
We may be required to obtain premarket approval from the FDA for additional
configurations of FLOSEAL before they may be marketed. The FDA may also limit
the commercial claims and uses of any of our future products.
THE EUROPEAN FEAR OF "MAD COW DISEASE" COULD ADVERSELY IMPACT ACCEPTANCE OF OUR
PRODUCTS IN EUROPE.
There is uncertainty as to the European acceptance of products that
incorporate elements derived from cows. This uncertainty is due to concerns over
transmission of disease from cows to humans. This disease in cows is commonly
referred to as "mad cow disease." Transmission of this disease to humans may
cause serious illness or death. FLOSEAL and our other products under development
contain thrombin and gelatin derived from bovine tissue only from traceable U.S.
herds. There have been no cases of mad cow disease associated with cattle from
traceable U.S. herds. Despite this fact, concerns over transmission of this
disease to humans may prevent or substantially delay the acceptance of FLOSEAL
in Europe. A delay could materially and adversely affect our business.
WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO MANUFACTURE FLOSEAL IN HIGH VOLUMES
AT COMMERCIALLY REASONABLE COSTS.
We have produced FLOSEAL for use in Europe and our clinical trials.
However, we have limited experience manufacturing FLOSEAL or any of our other
products under development in the amounts necessary to achieve significant
commercial sales. We have expanded our manufacturing capacity, but we cannot be
certain we will be capable of reliable, high-volume manufacturing at
commercially reasonable costs. We could encounter problems related to:
o capacity constraints,
o production yields,
o quality control, and
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<PAGE>
o shortages of qualified personnel.
Such problems could affect our ability to adequately scale-up production of
our products and fulfill customer orders on a timely basis, which could
materially and adversely affect our business.
Our manufacturing facilities will be subject to QSR, international quality
standards and other regulatory requirements, including preapproval inspection
for FLOSEAL and periodic post-approval inspections for all products. Our failure
to implement and maintain our facilities in accordance with these regulatory
requirements and standards will result in a delay or termination of production.
Any delay or termination of production would materially and adversely affect our
business.
WE DO NOT HAVE LONG-TERM SUPPLY ARRANGEMENTS WITH OUR KEY SUPPLIERS. THERE IS A
RISK WE COULD LOSE ONE OR MORE OF OUR KEY SUPPLIERS, WHICH WOULD DISRUPT OUR
BUSINESS.
We currently purchase bovine hides and thrombin, essential elements of
FLOSEAL, as well as sterilization services for the end product, from single
suppliers. We purchase bovine hides from Spear Products and thrombin from
GenTrac, Inc. We do not have long-term supply arrangements with any of these
suppliers. In the event any of our current single source suppliers become
unavailable for any reason, we will be required to obtain regulatory approval of
alternative suppliers and our business would be disrupted. Any disruption caused
by a loss of one of these suppliers could materially and adversely affect our
business.
FAILURE OF OUR END-USERS TO OBTAIN ADEQUATE THIRD PARTY REIMBURSEMENT FOR THE
PROCEDURES UTILIZING FLOSEAL OR OUR OTHER PRODUCTS COULD ADVERSELY AFFECT OUR
BUSINESS.
In the United States, health care providers that purchase medical devices,
such as FLOSEAL and our other products under development, generally rely on
third party payors, such as federal Medicare, state Medicaid and private health
insurance plans, to reimburse some or all of the cost of the procedure in which
the medical device was used. We expect in a prospective payment system, such as
the one utilized by the Health Care Financing Administration which manages the
federal Medicare program, and whose polices are followed by state Medicaid and
private third party payors, our products' costs will be incorporated into the
overall cost of the procedures, and there will not be separate reimbursement for
our products. Our success depends, in part, upon health care providers obtaining
satisfactory reimbursement from third party payors for surgical procedures that
may use FLOSEAL and our other products under development. Failure by our
products' users to obtain sufficient reimbursement from third party payors for
procedures in which our products are used or adverse changes in governmental and
private third party payors' policies toward reimbursement for such procedures
could mean that they reduce or eliminate purchases of our products, which would
materially and adversely affect our business.
If we obtain the necessary foreign regulatory approvals, international
market acceptance of our products would be dependent, in part, upon the
availability of reimbursement for our products or procedures that use our
products by the prevailing health care payment systems. Reimbursement and health
care payment systems in international markets vary significantly by country and
include both government-sponsored health care and private insurance. We intend
to seek international reimbursement approvals where applicable. We cannot be
certain any such approvals will be obtained in a timely manner, if at all.
Failure to receive international reimbursement approvals could materially and
adversely affect our business.
WE MAY FACE PRODUCT LIABILITY CLAIMS RELATED TO THE USE OR MISUSE OF OUR
PRODUCTS.
We face an inherent business risk of product liability claims in the event
the use or misuse of our products results in personal injury or death. We have
not experienced any such claims to date, but we cannot be certain, in particular
after commercial introduction of our products, that we will not experience
losses due to product liability claims. We currently maintain liability
insurance with combined coverage limits of $3.0 million on a claims-made basis.
We cannot be certain that the insurance policies' coverage limits are adequate.
The
20
<PAGE>
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms, or at all. Any claims against us, regardless of
their merit, could materially and adversely affect our business.
YEAR 2000 COMPLIANCE
To date, all internal financial systems, network and telecommunications
equipment have operated without any known impact or disruption related to Year
2000. Prior to December 31, 1999, these systems were verified or upgraded to be
Year 2000 compliant or determined to have no material Year 2000 risk.
To date, we have not encountered any disruption of service or supply
provided to us by third parties which could be attributable to Year 2000.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN OUR
FORWARD-LOOKING STATEMENTS.
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. We used words such as "believes," "intends," "expects,"
"anticipates," "plans," and similar expressions identify forward-looking
statements. This Form 10-K also contains third party estimates regarding the
size and growth of the cardiovascular, spinal and vascular surgery markets, as
well as the size of the suture and staples market and topical hemostat market
and other marketing estimates. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in the forward-looking statements for the reasons described
above and elsewhere in this Form 10-K.
ITEM 2. PROPERTIES
Our headquarters are located in a 13,200 square foot facility in Mountain
View, California. The lease for this facility extends through December 31, 2001.
In mid-1999, we signed a short term rental agreement for approximately 700
square feet of temporary office facilities which is expected to be continued
through the first quarter 2000. In November 1999, we entered into a lease for a
new headquarters and manufacturing facility of approximately 72,500 square feet
in Fremont, California. The lease for the Fremont facility began January 1, 2000
and extends through December 31, 2006.
ITEM 3. LEGAL PROCEEDINGS
We are currently not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
21
<PAGE>
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is quoted on the Nasdaq National Market under the symbol
"FSON." The following table sets forth, for the periods indicated, the high and
low closing sales prices per share of our common stock, as reported on the
Nasdaq National Market for the periods stipulated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
1998
<S> <C> <C>
First Quarter $ 5.063 $ 3.000
Second Quarter 5.000 3.375
Third Quarter 4.125 2.250
Fourth Quarter 8.938 2.000
1999
First Quarter 7.750 5.125
Second Quarter 7.938 5.125
Third Quarter 13.500 7.547
Fourth Quarter 14.500 9.500
2000
First Quarter (through
March 22, 2000) 18.000 11.875
</TABLE>
As of March 22, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $17.125 per share and, on March 22, 2000, there
were 110 stockholders of record.
On November 17, 1999, the Company closed a private placement financing of
872,000 shares of common stock at $9.50 per share. Net proceeds, after
commissions and fees along with other costs associated with the offering,
totaled $7,616,000. The shares were registered under a Form S-3 on November 17,
1999. Stephens Inc. acted as placement agent. All purchasers were "accredited
investors" within the meaning of Rule 501 of Regulation D, as presently in
effect.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K. The statements of operations data for the years
ended December 31, 1999, 1998, and 1997 and the balance sheet data as of
December 31, 1999, 1998 and 1997 have been derived from audited consolidated
financial statements included elsewhere in this Form 10-K. The consolidated
statement of operations data for the years ended December 31, 1995 and the
balance sheet data as of December 31, 1996 and 1995 have been derived from
audited consolidated financial statements that are not included in this report.
The historical results are not necessarily indicative of the results of
operations to be expected in the future.
<TABLE>
<CAPTION>
----------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net Sales...................................... $ 254 $ -- $ 153 $ 31 $ --
Cost of sales and manufacturing start-up cost.. 731 -- 968 196 --
-------- -------- -------- ------- --------
Gross Loss.................................. (477) -- (815) (165) --
-------- -------- -------- ------- --------
Operating Expenses:
Research and development.................... 5,095 6,145 5,647 4,693 2,650
Sales and marketing......................... 1,441 614 2,421 1,582 142
General and administrative.................. 1,802 1,474 2,004 1,426 841
-------- -------- -------- ------- --------
Total operating expenses.................. 8,338 8,233 10,072 7,701 3,633
-------- -------- -------- ------- --------
Loss from operations........................ (8,815) (8,233) (10,887) (7,866) (3,633)
Interest income, net........................... 487 542 984 910 351
Other income (expense), net.................... 3 4 (49) - 1
-------- -------- -------- ------- --------
Net loss....................................... $ (8,325) $ (7,687) $ (9,952) $(6,956) $ (3,281)
======== ======== ======== ======= ========
Basic and diluted net loss per share........... $ (0.96) $ (1.08) $ (1.41) $ (1.52) $ (2.31)
======== ======== ======== ======= ========
Shares used in computing basic and diluted net
loss per share.............................. 8,707 7,145 7,070 4,563 1,423
======== ======== ======== ======= ========
BALANCE SHEET DATA:
Cash, cash equivalents and available for sale
securities (including long term position)... $ 14,066 $ 7,164 $ 14,459 $ 23,485 $ 5,918
Working capital................................ 11,550 6,242 11,850 21,072 5,314
Total assets................................... 16,216 8,088 15,540 25,063 6,629
Long term debt, including current portion...... 204 321 43 189 322
Accumulated deficit............................ (37,557) (29,232) (21,545) (11,593) (4,637)
Total stockholders' equity..................... 14,786 6,827 14,224 23,742 5,768
</TABLE>
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION AND OTHER PARTS OF THIS REPORT CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "BUSINESS - RISK FACTORS" COMMENCING ON PAGE
15 AND ELSEWHERE IN THIS FORM 10-K.
Overview
We are commercializing and developing proprietary collagen gel-based
products for use in controlling bleeding in a variety of surgeries. Our lead
product, FLOSEAL Matrix Hemostatic Sealant ("FLOSEAL") was approved on December
8, 1999 by FDA for marketing in the U.S. FLOSEAL combines a gel derived from
collagen with thrombin, a potent clotting agent, to control surgical bleeding.
We have designed FLOSEAL to complement sutures and staples and to overcome
limitations of existing products used to control bleeding, including topical
hemostats, fibrin glues and other types of surgical sealants and adhesives.In
April 1999, we received the CE mark which will allow us to commercialize FloSeal
in the European Union.
In November 1998, we completed enrollment in a 309-patient U.S. pivotal
clinical trial for FLOSEAL in patients undergoing cardiac, vascular and spinal
surgery. The pivotal trial was designed primarily to test whether FLOSEAL
stopped bleeding within ten minutes at least as frequently as the Gelfoam plus
thrombin control. Gelfoam plus thrombin is a product widely used to control
surgical bleeding. We anticipate FLOSEAL competing against Gelfoam plus
thrombin. The trial showed that FLOSEAL stopped patients' bleeding within ten
minutes in 96% of all patients treated with FLOSEAL, whereas Gelfoam plus
thrombin stopped patients' bleeding within ten minutes in 77% of all patients in
the control group. The trial also showed that FLOSEAL stopped patients' bleeding
at least two times more quickly than Gelfoam plus thrombin.
We have reported revenues of $254,000 in total sales of FLOSEAL for the
second, third and fourth quarters of 1999. Revenues are projected to increase.
We also anticipate, however, incurring increased expenses relating to FLOSEAL
sales and marketing, research and development, manufacturing and general and
administrative expenses. We have not achieved, nor do we expect to achieve,
profitability before 2001.
We are also developing additional bleeding control products based upon the
core technology underlying FLOSEAL. These products include a configuration of
FLOSEAL for use in ear, nose and throat (ENT) surgeries, a femoral artery
puncture sealing device for use following vascular interventional procedures and
the FLOSEAL sponge, a dry, sponge-like formulation of FLOSEAL requiring no
mixing, for use in trauma, ambulance and battlefield applications. We expect to
begin commercial shipments with our ENT configuration of FLOSEAL by the end of
2000. We expect to begin clinical trials for the femoral artery closure device
before the end of 2000. Future products require approvals by FDA and other
regulators, which cannot be guaranteed.
We have been expanding our manufacturing capacity in order to be able to
meet the anticipated product supply requirements for commercial sale of FLOSEAL.
In November 1999, we entered into a lease for a 72,500 square feet building in
Fremont, California. In conjunction with this new facility, we anticipate
spending a total of approximately $2.2 million for the purchase of equipment for
production and research & development, office furnishings and equipment and
leasehold improvements.
As of December 31, 1999, we had an accumulated deficit of approximately
$37.6 million.
24
<PAGE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND 1997
REVENUES. We recorded revenues of $254,000, none and $153,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. We commenced selling
FLOSEAL in 1999 and stopped selling RapiSeal in 1997.
GROSS LOSS. We had a gross loss of $477,000, none and $815,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. In 1999, the
increase in the gross loss is the result of the expenses associated with the
cost of FLOSEAL plus start-up manufacturing costs. In 1998, the decrease in the
gross loss a result of discontinuing the sale of RAPISEAL products.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$5,095,000, $6,145,000 and $5,647,000 for the years ended December 31, 1999,
1998 and 1997, respectively. The decrease in 1999 of $1,050,000 was due
primarily to the conclusion of the clinical trail and development expenses
related to FLOSEAL. The increase of $498,000 in 1998 was due to the clinical
trail and increased development expenses related to FLOSEAL. We believe
significant investment in research and development is essential to our future
success and we expect research and development expenses will increase in future
periods.
SALES AND MARKETING. Sales and marketing expenses were $1,441,000, $614,000
and $2,421,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase of $827,000 in 1999 is the result of sales and
marketing efforts to establish FLOSEAL in Europe and efforts to build a direct
sales force in the US in late 1999. The decrease of $1,807,000 in 1998 resulted
from the cessation of our sales and marketing efforts related to RapiSeal. We
anticipate that sales and marketing expenditures will increase in future periods
in connection with the commercial launch of FLOSEAL.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1,802,000, $1,474,000 and $2,004,000 for the years ended December 31, 1999,
1998 and 1997, respectively. The increase of $328,000 in 1999 is the result of
hiring an experienced team to support the drive to attract new capital and make
preparations for the commercialization of FLOSEAL and support our growth. The
decrease of $530,000 in 1998 resulted from reduction of staff and consolidation
of facilities following discontinuation of the RapiSeal business. We believe
general and administrative expenses will increase in future periods.
INTEREST INCOME AND EXPENSE, NET. Net interest and other income and expense
was $490,000, $546,000 and $935,000 for the years ended December 31, 1999, 1998
and 1997, respectively. The decrease of $56,000 in 1999 is the result of shift
in mix of investments, decreasing long term investments in favor of short-term
investments and decreases in interest rates partially offset by increases in
cash, cash equivalents and available-for-sale securities resulting from the
April 1999 follow-on public offering and November 1999 private placement
financing. The decrease of $389,000 in 1998 resulted from decreased cash, cash
equivalents and available-for-sale securities.
EXIT CHARGES. During the fourth quarter of 1997, we made a decision to
discontinue sales of our RapiSeal patch. We incurred exit charges of $559,000,
which consisted of the following components:
25
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT CLASSIFICATION ON STATEMENT OF OPERATIONS
- ----------------------------------- -------- -----------------------------------------
<S> <C> <C>
Equipment.................................... $ 115,000 Cost of Sales
Personnel severance.......................... 125,000 Sales and marketing, general
and administrative and research
and development
Inventory and purchase commitments........... 210,000 Cost of sales
Accounts receivable and potential returns.... 25,000 Sales
Patents...................................... 84,000 Research and development
--------
Total........................................ $ 559,000
========
</TABLE>
During 1998, we negotiated a lower exit charge from one of our supply
agreements, which resulted in a change to our reserve estimate by $50,000. Our
anticipated timing until the reserve is completely depleted is the fourth
quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
From inception to December 31, 1999, we incurred net losses resulting in an
accumulated deficit of $37,557,000. We have financed our operations primarily
through private sales of equity securities and an initial public offering of
common stock in June 1996 together aggregating net proceeds of $24,419,000. In
April 1999 and November 1999, we concluded a follow-on public offering and a
private placement financing, respectively, that together aggregated net proceeds
of $15,761,000.
Cash, cash equivalents and available-for-sale securities (including long
term position) totaled $14,066,000, $7,164,000 and $14,459,000 as of December
31, 1999, 1998 and 1997, respectively. The increase of $6,902,000 from 1998 to
1999 was due to the follow-on offering in April and private placement in
November 1999 offset by net losses. The decrease from 1997 to 1998 was primarily
due to net losses.
Cash flows used in operating activities were $8,290,000, $7,468,000 and
$8,644,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
These cash outflows resulted primarily from funding our net losses. In 1999, we
also made an investment in inventory of $582,000, increased other assets by
$147,000 and accounts receivable by $145,000. In addition, capital expenditures
for property and equipment of $735,000, $245,000 and $415,000 for the years
ended December 31, 1999, 1998 and 1997, respectively, contributed to the cash
outflows.
In December 1997, we signed an agreement for a bank loan facility to
finance existing equipment up to a total of $1,000,000, and new equipment
purchases for up to a total facility limit of $2,500,000. The facility is
secured by the equipment financed. The loan balance is subject to a floating
interest rate equal to the bank's prime rate plus 1.5%. As of December 31, 1999,
we had drawn down $204,000 on the existing equipment portion of the loan
facility and had no draw down on the new equipment portion of the loan facility.
Available credit under this facility, as amended, expired in February 1998. In
connection with this loan facility, we issued a warrant to purchase 4,500 shares
of common stock at an exercise price of $4.00 per share. This warrant expires in
December 2002.
Our future capital requirements will depend on numerous factors, including
rate of acceptance of FloSeal in the market as evidenced by achieving revenues,
our ability to scale up manufacturing activities, and the nature, timing and
success of other products under development. We expect to commit substantial
capital resources to the development of commercial-scale manufacturing for
FloSeal. In November 1999, we entered into a lease for a 72,500 square foot
building in Fremont, California. We expect to commit approximately $2.2 million
for manufacturing equipment, research and development equipment, office
26
<PAGE>
furnishings and equipment and leasehold improvements. We are seeking to
secure an equipment lease line to finance most of the expenditures for
equipment. The associated working capital requirements for manufacturing and
commercial launch of a new product are also expected to be substantial. We
expect to incur substantial expenditures to develop our direct sales and
marketing force. The timing and amount of capital requirements cannot be
accurately predicted.
When we need to raise additional money to fund our operations, we cannot be
certain that funding from any source will be available to us on acceptable
terms, or at all. In November 1999, we said a follow-on offering may take place
around mid year 2000. The amount and the timing of raising additional funds
will depend primarily upon our ability to generate revenues from the sale of
FLOSEAL. Our inability to obtain additional funding on reasonable terms will
materially and adversely affect our business.
At December 31, 1999, we had approximately $24,419,000 in federal and
$27,213,000 in state net operating loss carry forwards which expire in the years
2001 through 2019, respectively. Utilization of federal income tax net operating
loss carry forwards is subject to certain limitations under Section 382 of the
Internal Revenue Code of 1986, as amended. These annual limitations may result
in expirations of net operating losses and research and development credits
before they can be fully utilized.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. In July 1999, the FASB issued Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" ("SFAS 137"). SFAS 137 deferred the effective date of SFAS 133 until the
first fiscal year beginning after June 15, 2000. To date, we have not engaged in
derivative and hedging activities. We will adopt SFAS No. 133 as required for
our first quarterly filing of 2001.
27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio and bank borrowings. We do not use derivative financial
instruments in our investment portfolio, and our investment portfolio only
includes highly liquid instruments with an original maturity to us of generally
less than one year. We have primarily entered into debt obligations for capital
expenditures. We are subject to fluctuating interest rates that may impact,
adversely or otherwise, our results of operations or cash flows for our variable
rate bank borrowings, available-for-sale securities and cash and cash
equivalents.
The table below presents principal amounts and related weighted average
interest rates by year of maturity for our investment portfolio and debt
obligations:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------
1999 2000 2001 TOTAL
-----
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,164 - - $ 8,164
Average interest rate 5.88% - - 5.88%
Available-for-sale securities including
long term position $ 4,814 $ 996 - $ 5,810
Average interest rate 6.28% 6.39% - 6.28%
Liabilities:
Bank borrowings (including current portion) $ 117 $ 87 $ - $ 204
Average interest rate 10.00% 10.00% - 10.00%
</TABLE>
The estimated fair value of our cash and cash equivalents approximates the
principal amounts reflected above based on the short maturities of these
financial instruments. The estimated fair value of our debt obligations
approximates the principal amounts reflected above based on rates currently
available to us for debt with similar terms and remaining maturities.
Although payments under the operating lease for our facility are tied to
market indices, we are not exposed to material interest rate risk associated
with the operating lease.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
This information is incorporated herein by reference to the financial
statements listed in Item 14 of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
28
<PAGE>
PART III
Certain information required by Part III is omitted from this Report
because the registrant will file a definitive proxy statement within 120 days
after the end of its fiscal year pursuant to Regulation 14A (the "Proxy
Statement") for its annual meeting of stockholders to be held on June 15, 2000
and the information therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors required by this item is
incorporated by reference to the Company's Proxy Statement. Information
regarding executive officers is included in Part I hereof under the caption
"Executive Officers of the Company" and is hereby incorporated by reference into
this Item 10.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
29
<PAGE>
PART IV
<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
<S> <C> <C> <C>
(a) 1. FINANCIAL STATEMENTS PAGE(S)
-------
Report of Independent Accountants. F-2
Consolidated Balance Sheets, December 31, 1999 and 1998. F-3
Consolidated Statements of Operations and Comprehensive Loss,
Years Ended December 31, 1999, 1998 and 1997. F-4
Consolidated Statements of Stockholders' Equity, Years Ended
December 31, 1999, 1998 and 1997. F-5
Consolidated Statements of Cash Flows, Years Ended December 31,
1999, 1998 and 1997. F-6
Notes to Consolidated Financial Statements. F-7 to F-18
2. 2. FINANCIAL STATEMENT SCHEDULE
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or the
notes thereto.
3. EXHIBITS
The Exhibits listed on the accompanying index immediately
following the signature page are filed as part of this Report.
(b) REPORTS ON FORM 8-K
Not applicable.
(c) EXHIBITS
See Item 14 (a) 3. above.
</TABLE>
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) the Securities Exchange Act
of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.
FUSION MEDICAL TECHNOLOGIES, INC. Date: March 29, 2000
By: /s/PHILIP M. SAWYER
-------------------
PHILIP M. SAWYER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Philip M. Sawyer his attorneys-in-fact, and each
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PHILIP M. SAWYER President, Chief Executive Officer March 29, 2000
--------------------
(PHILIP M. SAWYER) and Director
(Principal Executive Officer)
/s/ LARRY J. STRAUSS Vice President, Finance and March 29, 2000
--------------------
(LARRY J. STRAUSS) Chief Financial Officer
(Principal Accounting Officer)
/s/ GORDON W. RUSSELL Chairman of the Board of Directors March 29, 2000
---------------------
(GORDON W. RUSSELL)
/s/ OLAV B. BERGHEIM Director March 29, 2000
--------------------
(OLAV B. BERGHEIM)
/s/ VAUGHN D. BRYSON Director March 29, 2000
--------------------
(VAUGHN D. BRYSON)
31
<PAGE>
/s/DOUGLAS E. KELLY, M.D. Director March 29, 2000
- --------------------------
(DOUGLAS E. KELLY, M.D.)
/s/ J. MICHAEL EGAN Director March 29, 2000
- --------------------
(J. MICHAEL EGAN)
32
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBITS
<S> <C>
3.1(1) Certificate of Incorporation of Registrant.
3.4(1) Amended and Restated By-laws of the Registrant.
10.1(1) Restated Shareholder Rights Agreement dated as of January 17, 1995.
10.2(1) 1993 Stock Option Plan, as amended, and form of stock option agreement.
10.3(1) 1996 Employee Stock Purchase Plan.
10.4(1) 1996 Director Stock Option Plan, and form of stock option agreement.
10.5(1) Form of Director and Officer Indemnification Agreements.
10.6(1) Lease Agreement dated June 15, 1994 between the Registrant and James R. Benson.
10.7(2) Loan and Security Agreements dated December 21, 1997 between the Registrant and Imperial Bank
10.8(2) First Amendment dated December 21, 1997 to Warrant to Purchase Stock dated May 31, 1995
10.9(2) Warrant to Purchase Stock dated December 21, 1997
10.10(3) Purchase Agreement dated January 1, 1997 between Registrant and Spear
Products
10.11(4)* Distribution Agreement dated July 1, 1999 between Registrant and Sulzer Spine-Tech Inc.
10.12(5) Lease Agreement dated October 15, 1999 between Registrant and Tarlton/
Wohl Venture Nine LLC.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
27.1 Financial Data Schedule.
(1) Previously filed as exhibits to the Company's Registration Statement on Form S-1 SEC file number 000-28460.
(2) Previously filed as exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(3) Incorporated by reference from the Company's Form 10-Q for the quarter ended March 31, 1999.
(4) Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1999.
(5) Incorporated by reference from the Company's Form 10-Q for the quarter ended September 30, 1999.
(*) Confidential treatment granted for portions of this Exhibit.
</TABLE>
Fusion(TM), Fusion Medical Technologies, Inc.(TM), FloSeal Matrix(TM),
FloSeal(R), Proceed(TM) RapiSeal Patch(TM) and SilverBullet(TM) are trademarks
of Fusion Medical Technologies, Inc. Any use is strictly prohibited without the
prior written consent of Fusion Medical Technologies, Inc.
33
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.............F-3
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended December 31, 1999, 1998 and 1997..................F-4
Consolidated Statements of Stockholders' Equity For the Years
Ended December 31, 1999, 1998 and 1997................................F-5
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1999, 1998 and 1997......................................F-6
Notes to Consolidated Financial Statements...............................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Fusion Medical Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss, of
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Fusion Medical Technologies, Inc. and subsidiary (the
"Company") at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
February 4, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,164 $ 4,151
Available-for-sale-securities 3,818 3,013
Accounts receivable 147 --
Inventory 582 --
Prepaids and other current assets 182 135
--------- ----------
Total current assets 12,893 7,299
Restricted cash deposits 1,088 --
Available-for-sale securities 996 --
Property and equipment, net 1,038 735
Other assets 201 54
--------- ----------
Total assets $ 16,216 $ 8,088
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 719 $ 157
Accrued expenses 507 783
Current portion of bank borrowings 117 117
--------- ----------
Total current liabilities 1,343 1,057
Bank borrowings, net of current portion 87 204
--------- ----------
Total liabilities 1,430 1,261
--------- ----------
Commitments (Note 6)
Stockholders' equity:
Preferred stock, par value $0.001: Authorized: 5,000 shares; issued and -- --
outstanding: none
Common stock, par value $0.001: Authorized: 50,000 shares; issued and
outstanding: 10,009 shares in 1999 and 7,211 shares in 1998 10 7
Additional paid-in capital 52,564 36,137
Deferred compensation (202) (87)
Accumulated other comprehensive income (loss) (29) 2
Accumulated deficit (37,557) (29,232)
Total stockholders' equity 14,786 6,827
--------- ----------
Total liabilities and stockholders' equity $ 16,216 $ 8,088
========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Year Ended December 31,
------------------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 254 $ 153
Cost of sales and start-up manufacturing costs 731 968
-------- ------- --------
Gross loss (477) (815)
-------- ------- --------
Operating Expenses:
Research and development 5,095 6,145 5,647
Sales and marketing 1,441 614 2,421
General and administrative 1,802 1,474 2,004
-------- ------- --------
Total operating expenses 8,338 8,233 10,072
-------- ------- --------
Loss from operations (8,815) (8,233) (10,887)
Other income (expense):
Interest income 513 581 1,008
Interest expense (26) (39) (24)
Other income (expense), net 3 4 (49)
-------- ------- --------
Net loss (8,325) (7,687) (9,952)
Other comprehensive income (loss):
Change in unrealized gain or loss on available
for sale securities (31) -- 13
-------- ------- --------
Comprehensive loss $(8,356) $(7,687) $ (9,939)
======== ======= ========
Basic and diluted net loss per share $ (0.96) $ (1.08) $ (1.41)
======== ======= ========
Shares used in computing basic and diluted net
loss per share 8,707 7,145 7,070
======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended December 31, 1999
(in thousands)
Notes Accumulated
Additional Receivable Other
Common Stock Paid-In >From Deferred Comprehensive Deficit
Shares Amount Capital Shareholder Compensation Income (Loss) Accumulated Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 6,999 $ 7 $36,579 $(48) $(1,191) $(11) $(11,593) $23,743
Issuance of common stock:
Upon exercise of stock options 84 60 60
Under employee stock purchase plan 35 124 124
Interest on notes receivable (6) (6)
Change in unrealized loss on available
for sale securities 13 13
Adjustment for cancellation of stock (667) 667
Amortization of deferred compensation 242 242
Net loss (9,952) (9,952)
----- --- ------ ---- ------ ---- ------- ------
Balances, December 31, 1997 7,118 7 36,096 (54) (282) 2 (21,545) 14,224
Issuance of common stock:
Upon exercise of stock options 65 29 29
Under employee stock purchase plan 28 73 73
Payment of notes receivable 54 54
Adjustment for cancellation of stock (61) 61
Amortization of deferred compensation 134 134
Net loss ( 7,687) ( 7,687)
----- --- ------ ---- ------ ---- ------- ------
Balances, December 31, 1998 7,211 7 36,137 - (87) 2 (29,232) 6,827
Issuance of common stock:
Follow-on public offering, net of
issuance costs of $1,080 1,800 2 8,143 8,145
Private placement, net of issuance
costs of $668 872 1 7,615 7,616
Upon exercise of stock options 109 212 212
Under employee stock purchase plan 17 103 103
Change in unrealized gain/loss on
sale securities (31) (31)
Unearned compensation on NSO 354 (354)
Amortization of deferred compensation 239 239
Net loss (8,325) (8,325)
------- --- ------- ---- ------ ---- ------- ------
Balances, December 31, 1999 10,009 $10 $52,564 $ - $(202) $(29) $(37,557) $14,786
======= === ======= ==== ====== ==== ======== =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
FUSION MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows used for operating activities:
Net loss $ (8,325) $ (7,687) $ (9,952)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 432 319 464
Loss on disposition of property and equipment -- -- 264
Accretion of available-for-sale securities (8) 16 17
Amortization of deferred compensation 239 134 242
Interest on notes receivable from stockholder -- -- (6)
Provision for doubtful accounts -- -- 10
Changes in assets and liabilities:
Accounts receivable (147) 21 (8)
Inventories (582) -- 83
Prepaids and other current assets ( 47) 72 100
Other assets (147) (10) --
Accounts payable 562 (441) (281)
Accrued expenses (276) 108 423
------ ------ ------
Net cash used in operating activities (8,299) (7,468) (8,644)
------ ------ ------
Cash flows from investing activities:
Acquisition of property and equipment (735) (245) (415)
Purchases of available-for-sale-securities (7,513) (1,996) (10,515)
Restructured Cash (1,088) -- --
Sales of available-for-sale securities 5,689 5,953 16,231
------ ------ ------
Net cash provided by (used in) investing activities (3,647) 3,712 5,301
------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs 16,076 102 184
Proceeds from bank borrowings -- 278 ---
Repayment of notes payable (117) -- (146)
Payment received on note receivable from stockholder -- 54 ---
------ ------ ------
Net cash provided by financing activities 15,959 434 38
------ ------ ------
Net increase (decrease) in cash and cash equivalents 4,013 (3,322) (3,305)
Cash and cash equivalents, beginning of year 4,151 7,473 10,778
------ ------ ------
Cash and cash equivalents, end of year $ 8,164 $ 4,151 $ 7,473
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 26 $ 80 $ 64
======= ======= =======
Cash paid for taxes $ -- $ 1 $ 1
======= ======= =======
Supplemental disclosure of noncash investing and financing activities:
Adjustment for cancellation of stock options $ -- $ 61 $ 667
======= ======= =======
Issuance of stock options to outside consultants $ 354 $ -- $ --
======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY
Fusion Medical Technologies, Inc. (the "Company") was incorporated in the
State of Delaware in 1992. The Company is developing, and commercializing
proprietary collagen and thrombin gel-based products used to control bleeding in
a variety of surgeries. Since its inception, the Company has devoted
substantially all of its efforts to developing products, raising capital and
recruiting personnel. The Company operates in one business segment.
The Company sold 2,100,000 shares of common stock at $13.00 per share
through an initial public offering in June 1996. Net proceeds (after
underwriter's commissions and fees along with other costs associated with the
offering) totaled $24,419,000. Upon completion of the offering, all outstanding
shares of preferred stock (a total of 7,659,000 shares) were converted into
shares of common stock.
In April 1999, the Company sold 1,800,000 shares of common stock at $5.125
per share in a follow-on public offering. Net proceeds, after commissions and
fees along with other costs associated with the offering, totaled $8,145,000. In
November 1999, the Company closed a private placement financing with selected
accredited investors of 872,000 shares of common stock at $9.50 per share. Net
proceeds, after commissions and fees along with other costs associated with the
offering, totaled $7,616,000.
These financial statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. In the course of
its development, the Company has sustained operating losses and expects such
losses to continue through at least 2001. Management believes that its existing
cash balances and other potential financing alternatives will be sufficient to
meet the Company's capital and operating requirements for the next 12 months.
There can be no assurance that the Company will not require additional funding
and should this prove necessary, the Company may sell additional shares of its
common stock or preferred stock through private placement or further public
offerings. There can be no assurance that the Company would be able to obtain
additional debt or equity financing, if and when needed, on terms that the
Company finds acceptable. Any additional equity or debt financing may involve
substantial dilution to the Company's stockholders, restrictive covenants or
high interest costs. The failure to raise needed funds on sufficiently favorable
terms could have a material adverse effect on the Company's business, operating
results and financial condition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated Financial Statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangible
assets to be held and used, or disposed of, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company assesses the impairment of long-lived assets, based
upon the estimated future cash flows from these assets.
CASH AND CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash and cash
equivalents include money market funds and various deposit accounts.
The Company has classified its investments as "available-for-sale." Such
investments are recorded at fair value and unrealized gains and losses, if
material, are recorded as a separate component of equity until realized.
Interest income is recorded using an effective interest rate, with associated
premium or discount amortized to "interest income." The cost of securities sold
is based upon the specific identification method. All available-for-sale
securities with original maturities greater than 365 days are classified as long
term.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
on a first-in, first-out basis.
DEPRECIATION AND AMORTIZATIOn
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated lives of three to five years.
Maintenance and repairs are charged to operations as incurred. Leasehold
improvements are amortized over their estimated useful lives, or the lease term,
if shorter.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of product to the customer,
upon fulfillment of acceptance terms, if any, and when no significant
contractual obligations remain outstanding.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are expensed as incurred.
ADVERTISING EXPENSES
The Company recognizes advertising expenses as they are incurred.
Advertising expenses for the years ended December 31, 1999, 1998 and 1997 were
$12,000, none and $1,000 respectively.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
F-8
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
CONCENTRATION OF CREDIT RISK
The Company's cash, cash equivalents and available-for-sale securities are
maintained at three financial institutions. Deposits in these institutions may
exceed the amount of insurance provided on such deposits. At December 31, 1999
two customers accounted for 89% of the total accounts receivable. At December
31, 1999 two customers accounted for 60% of the total sales revenue.
RISKS AND UNCERTAINTIEs
The Company's products require approvals from the Food and Drug
Administration ("FDA") and international regulatory agencies prior to the
commencement of commercialized sales. There can be no assurance that the
Company's products will receive the required approvals. If the Company was
denied such approvals, or such approvals were delayed, it would have a
materially adverse impact on the Company.
The Company is dependant upon the success of its lead product under
development. The Company's future success depends upon its ability to develop,
introduce and market new products, its ability to obtain components from key
suppliers, and to obtain
sufficient manufacturing capacity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses and other liabilities approximate fair value due to their short
maturities. Based upon borrowing rates currently available to the Company for
loans with similar terms, the carrying value of the Company's bank borrowings
approximate fair value. Estimated fair values for available-for-sale securities,
which are separately disclosed elsewhere, are based on quoted market prices for
the same or similar instruments.
COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from stock options and warrants have been excluded from the computation of
diluted net loss per share, as their effect is anti-dilutive.
F-9
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Stock options to purchase 1,795,000, 1,113,000 and 992,000 shares of common
stock at prices ranging from $0.16 to $14.00 per share were outstanding at
December 31, 1999, 1998 and 1997, respectively, but were not included in the
computation of diluted net loss per share because they were anti-dilutive.
Warrants to purchase 12,785, 12,785 and 8,285 shares of common stock at
$4.00.per share were outstanding at 1999, 1998 and 1997, respectively, but were
not included in the computation of diluted net loss per share because they were
anti-dilutive. The aforementioned stock options and warrants could potentially
dilute earnings per share in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. In July 1999, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133"("SFAS 137"). SFAS 137 deferred the effective date of SFAS 133
until the first fiscal year beginning after June 15, 2000. The Company, to date,
has not engaged in derivative and hedging activities. The Company will adopt
SFAS No. 133 as required for its first quarterly filing of calendar year 2001.
3. AVAILABLE-FOR-SALE SECURITIES
The following summarizes the Company's available-for-sale securities
(including long term position) (in thousands):
<TABLE>
<CAPTION>
UNREALIZED
COST GAIN/(LOSS) FAIR VALUE MATURITY DATES
------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Corporate Bonds $ 4,745 $ (29) $ 4,814 4/00 - 03/01
DECEMBER 31, 1998
Corporate Bonds $ 3,011 $ 2 $ 3,013 1/99 - 6/99
</TABLE>
During 1999, 1998 and 1997, there were no realized gains or losses on the
disposal of available-for-sale securities.
F-10
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
(IN THOUSANDS)
1999 1998
----------- -----------
<S> <C> <C>
Inventory:
Raw materials $ 237 $ -
Work in progress 150 -
Finished goods 195 -
-------- ---------
$ 582 $ -
======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
(IN THOUSANDS)
1999 1998
----------- -----------
<S> <C> <C>
Property and equipment:
Computer equipment $ 366 $ 295
Office furniture and equipment 146 147
Machinery and equipment 1,210 1,086
Leasehold improvements 758 217
-------- ---------
Total 2,480 1,745
Less accumulated depreciation and amortization (1,442) (1,010)
-------- ---------
Net $ 1,038 $ 735
======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
(IN THOUSANDS)
1999 1998
----------- -----------
<S> <C> <C>
Accrued expenses:
Accrued compensation $ 269 $ 157
Restructuring (Note 12) 43 43
Clinical trial 5 383
Other 190 200
-------- ---------
$ 507 $ 783
======== =========
</TABLE>
F-11
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. BANK BORROWINGS
In December 1997, the Company signed a loan agreement with a bank to
finance existing equipment and future equipment purchases up to $2,500,000.
Subject to certain terms and conditions, the facility finances a percentage of
the invoice cost of existing equipment and all of the invoice cost of future
equipment purchases. The equipment purchased serves as collateral. Borrowings
under the facility, as amended, expired in February 1998. As of December 31,
1999, the Company had a balance of $204,000 outstanding. The loan is payable in
monthly installments bearing interest at the rate of prime plus 1.5% per annum
(10.0% at December 31, 1999). This borrowing agreement contains covenants
restricting the payment of dividends.
Future payments under this loan agreement are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
Current $ 117
2001 87
--------
$ 204
========
</TABLE>
6. COMMITMENTS
The Company leases office, laboratory and manufacturing space under various
operating leases, the latest expiring in December 2006. Except for the 7 year
lease commencing January 1, 2000 for the Company's new headquarters and
manufacturing facility in Fremont, California, the leases generally require the
Company to pay property taxes, insurance and ordinary maintenance and repairs in
addition to the lease payment.
The Company issued a letter of credit to the landlord of the Fremont
building in the amount of $1,087,500. The letter of credit is collateralized by
a cash deposit held in an interest bearing account and is reflected as
restricted cash on the accompanying balance sheet. In exchange for the letter of
credit, the landlord is providing improvements to the site equal to or greater
than $1,087,500. Repayment to the landlord for these improvements are deemed
rental payments and are payable during the initial term of the lease. The letter
of credit extends through the initial lease term and will decrease pro-rata upon
each annual renewal.
F-12
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rent expense for the years ended December 31, 1999, 1998 and 1997, was
approximately $436,000, $304,000 and $363,000, respectively.
Minimum future lease payments under the lease agreements at December 31,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
2000 $ 1,366
2001 1,826
2002 1,518
2003 1,570
2004 1,623
Thereafter 3,376
-------
$ 11,279
=======
</TABLE>
F-13
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Under the Company's Restated Articles of Incorporation, the Company's
preferred stock is issuable in series. As of December 31, 1999, 5,000,000 shares
of preferred stock were authorized and no preferred stock was issued or
outstanding. The previously outstanding preferred stock was converted into
common stock in connection with the Company's initial public offering in June
1996.
WARRANTS
During September 1994, in connection with the issuance of a note payable,
the Company issued a warrant to purchase 20,000 shares of Series B preferred
stock at an exercise price of $1.66. Upon the closing of the Company's initial
public offering and conversion of the Company's previously outstanding preferred
stock into common stock, the warrant became exercisable for 8,285 shares of
common stock at an exercise price of $4.80 per share. In 1997, this warrant was
modified to $4.00 per share and the expiration date was extended to September
2000.
In December 1997, in connection with bank borrowings, the Company issued a
warrant to purchase 4,500 common shares at an exercise price of $4.00 per share.
This warrant expires in five years. The value of these warrants was calculated
using the Black Scholes Model. The calculated value was deemed to be
insignificant.
STOCK OPTION PLAN
In November 1993, the Company established the 1993 Stock Option Plan (the
Plan), which provides for both incentive stock options (ISOs) and non-qualified
stock options (NSOs) to be granted to employees and consultants. All NSOs allow
for the purchase of common stock at prices not less than 85% of the fair market
value as determined by the Board of Directors at the date of grant. ISOs allow
for the purchase of common stock at prices not less than 100% of the fair market
value as determined by the Board of Directors at the date of grant. If at the
time the Company grants an option the optionee owns more than 10% of the total
combined voting power of all the classes of stock of the Company, the option
price shall be at least 110% of the fair value and the term of the options shall
be five years from the date of grant. All other options must be exercised within
ten years from the date of grant. Options vest as determined by the Board of
Directors, generally over four years.
In the event that options are exercised prior to vesting, upon termination
of service, the Company has the right to repurchase the issued common stock at
the original issuance price. Shares are released from the Company's repurchase
option over periods consistent with the original options' vesting period. As of
December 31, 1999, 23,583 shares are subject to repurchase. The Company has
reserved 2,640,000 shares of common stock for issuances to employees, and
officers under the Plan.
F-14
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the Plan is as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
SHARES WEIGHTED
AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES EXERCISE PRICE TOTAL
----------- --------- -------------- -----
<S> <C> <C> <C> <C>
Balances, December 31, 1996 400 618 $1.13 $ 701
Additional Shares authorized
Options granted (557) 557 4.33 2,410
Options cancelled 99 (99) 2.17 (215)
Options exercised (84) 0.71 (60)
-------------------------------------------------------------
Balances, December 31, 1997 242 992 2.86 2,836
Additional Shares authorized
under the Plan 400 -- -- --
Options granted (354) 354 4.73 1,676
Options cancelled 240 (240) 4.31 (1,034)
Options exercised -- (65) 0.45 (29)
--------------------------------------------------------------
Balances, December 31, 1998 528 1,041 3.31 3,449
Additional Shares authorized
under the Plan 750 --
Options granted (926) 926 8.08 7,481
Options cancelled 65 (65) 4.41 (286)
Options exercised -- (109) 1.94 (212)
--------------------------------------------------------------
Balances, December 31, 1999 417 1,793 $5.82 $10,432
=== ===== ===== =======
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the weighted average
fair value of options granted was $4.36, $1.67 and $2.42 per share,
respectively.
In February 1997, the Company offered employees the right to cancel certain
outstanding stock options and receive new options with an exercise price of
$4.38 per share, the closing price of the common stock on the date individual
employees agreed to cancel their original outstanding stock options. Options to
purchase a total of 49,000 shares at original exercise prices ranging from $6.00
to $11.50 per share were cancelled and new options were issued in February 1997.
The option term and vesting under the new options are identical to the terms of
the cancelled options.
During 1999, the Company granted 30,000 non-qualified stock options to
consultants at excercise prices ranging from $3.25 to $8.97. The Company
determined the fair market value of these options using the Black Scholes option
pricing model with the following assumptions: expected life of ten years, a
weighted average risk-free interest rate of 5.0%, expected dividend yield of
zero and volatility of 90%. The deferred compensation relating to these options
was $354,000.
F-15
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
DIRECTOR OPTION PLAN
In May 1996, the Company approved the Director Option Plan and reserved
120,000 shares of common stock for issuance. Options to purchase 19,200 and
20,800 shares were granted in 1998 and 1999 respectively for a total of 59,200
shares. Shares are granted under the plan at 100% of the fair value of the
Company's common stock on the date of the grant. The options vest at the rate of
25% after the first year of service and the remaining amount equally over 36
months until fully vested after four years. These options expire ten years from
the date of grant and are only exercisable upon vesting.
EMPLOYEE STOCK PURCHASE PLAN
In May 1996, the Company approved the Employee Stock Purchase Plan and
reserved 280,000 shares of common stock for issuance. In 1999, a total of 17,288
shares of common stock were purchased under the plan at prices ranging from
$5.42 to $6.43 per share. In 1998, 28,000 shares of common stock were purchased
under the plan at $3.31 per share. Shares are purchased through employee's
payroll deductions at purchase prices equal to 85% of the lesser of the fair
value of the Company's common stock at either the beginning or the end of the
six-month purchase period.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standard No. 123 (SFAS No. 123) "Accounting for Stock-Based
Compensation." Had compensation cost for the Plan, the Director Option Plan and
the Employee Stock Purchase Plan been determined based on the fair value at the
grant date for awards in 1997, 1998 and 1999 consistent with the provisions of
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
for the years ended December 31, 1997, 1998 and 1999 would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Net loss - as reported $ (8,325) $ (7,687) $ (9,952)
========== ========= =========
Net loss - pro forma $ (9,176) $ (8,051) $ (10,313)
========== ========= =========
Basic and diluted net loss per share-as reported $ (0.96) $ (1.08) $ (1.41)
========== ========= =========
Basic and diluted net loss per share-pro forma $ (1.05) $ (1.13) $ (1.45)
========== ========= =========
</TABLE>
F-16
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 4.67%-6.80% 5.39%-5.77% 5.79%-6.6%
Expected life 4 years 4 years 4 years
Expected dividends - - -
Expected volatility 80% 83% 82%
</TABLE>
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
- ---------------------------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
- -------------- ------------- ------------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
$0.16 - 0.41 197,822 5.18 $ 0.36 197,494 $ 0.36
$1.00 - 2.41 24,351 6.09 2.41 23,701 2.41
$3.62 - 4.38 425,352 7.32 4.25 309,168 4.26
$4.50 - 7.13 692,800 8.68 5.42 221,263 5.21
$7.56 - 14.00 511,650 9.47 9.97 47,350 8.89
--------- -------
1,851,975 8.18 5.83 798,976 3.78
========= =======
</TABLE>
As of December 31, 1998 and 1997, options to purchase 525,000 and 230,000
shares of common stock were exercisable at weighted average exercise prices of
$2.55 and $0.99, respectively.
F-17
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
For the options granted in the 12 month period before the initial public
offering, the difference between the stock option exercise price and the deemed
fair market value of the Company's common stock at the date of issue of the
stock options, totaling $1,578,000 has been recorded as deferred compensation as
a component of stockholders' equity. Of this amount $850,000 of compensation
expense has been recognized as an expense through December 31, 1999 and $728,000
of the amount was adjusted for cancellation of stock options, due to the
termination of employment of certain employees.
8. EMPLOYEE BENEFIT PLAN
During 1995, the Company established a Retirement Savings and Investment
Plan (the 401(k) Plan) under which employees may defer a portion of their salary
up to the maximum allowed under IRS rules. The Company has the discretion to
make contributions to the 401(k) Plan. To date, the Company has not made any
contributions to the 401(k) Plan.
9. RELATED PARTIES
The Company has a consulting contract with a retired surgeon and medical
device designer. The contract pays a maximum of $1,500 per month for consulting
services and reimburses him for related expenses. The retired surgeon is a
shareholder of an affiliate of the Company and is related to an executive
officer.
10. INCOME TAXES
The tax effects of the significant temporary differences, which comprise
net deferred tax assets at December 31, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Capitalized start-up and research and development costs $ 4,198 $ 3,032
Research and development credit 1,023 811
Depreciation 138 159
Net operating loss carryforwards 9,869 7,472
Other accrued expenses 99 240
-------- --------
Net deferred tax asset 15,327 11,714
Less valuation allowance (15,327) (11,714)
-------- --------
Net deferred income taxes $ - $ -
======== ========
</TABLE>
F-18
<PAGE>
FUSION MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)
10. INCOME TAXES (CONTINUED)
The Company has established a valuation allowance to the extent of its
deferred tax assets since it is more likely than not that a benefit can not be
realized in the future due to the Company's recurring operating losses.
The Company had federal and state net operating loss carryforwards of
approximately $24,419,000 and $27,313,000, respectively, at December 31, 1999,
available to offset future regular and alternative minimum taxable income. The
Company's net operating loss carryforwards expire in 2001 through 2019, if not
utilized. The Company has federal and state research and development credit
carryforwards of $694,000 and $329,000, respectively, expiring in the years 2007
through 2019, respectively, if not utilized.
For federal and state tax purposes, a portion of the Company's net
operating loss carryforwards are subject to certain limitations on annual
utilization in case of changes in ownership, as defined by federal and state tax
law.
11. RAPISEAL BUSINESS EXIT
During the fourth quarter of 1997, the Company made a decision to
discontinue sales of its RapiSeal patch. These restructuring actions were taken
to align the Company's costs in light of the discontinuation of the RapiSeal
business. At year-end 1997, the Company incurred RapiSeal exit charges of
$559,000 for personnel severance, patent charges, and inventory and dedicated
equipment write-offs associated with exit of its RapiSeal business. A majority
of terminated employees were located in California and worked in sales,
marketing, research and development and administrative support functions. A
total of nine employees were terminated. Of such charges ($325,000) was charged
to cost of sales, ($209,000) to operating expenses and ($25,000) as a charge
against sales. In 1998 there was a change in reserve estimates of $50,000, due
to the favorable settlement of a contract with a third party. The majority of
the remaining cash outlays of $43,000 are expected to occur in fiscal 2000.
The following table summarizes the amounts that were charged and where they
are reflected in the accompanying statement of operations:
<TABLE>
<CAPTION>
Description Amount Classification on Statement of Operations
- ------------------------------------------------ --------- -----------------------------------------
<S> <C> <C>
Equipment........................................ $ 115,000 Cost of Sales
Personnel severance.............................. 125,000 Sales and marketing, general and
administrative and research and
development
Inventory and purchase commitments............... 210,000 Cost of sales
Accounts receivable and potential returns........ 25,000 Sales
Patents.......................................... 84,000 Research and development
---------
Total............................................ $ 559,000
=========
</TABLE>
F-19
<PAGE>
The following table summarizes the Company's restructuring reserve balances
through December 31, 1999: (in thousands)
<TABLE>
<CAPTION>
SALES COST OF GOODS EXPENSES TOTAL
----- ------------- -------- -----
<S> <C> <C> <C> <C>
Restructuring reserve.................... $ 25 $ 325 $ 209 $ 559
Non-cash charges......................... (10) (225) (233)
----- -------- ------- -------
Restructuring reserve balances
at December 31, 1997................... 15 100 211 326
Change in reserve estimate............... -- (50) -- (50)
Cash charges............................. (15) (50) (168) (233)
----- -------- ------- -------
Restructuring reserve balances at
At December 31, 1998 and 1999 $ -- $ -- $ 43 $ 43
===== ======== ======= =======
</TABLE>
F-20
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-10043, 333-32143, 333-87995) of Fusion
Medical Technologies, Inc. of our report dated February 4, 2000, relating to the
consolidated financial statements and financial statement schedule, which
appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,164
<SECURITIES> 3,818<F1>
<RECEIVABLES> 147
<ALLOWANCES> 0
<INVENTORY> 582
<CURRENT-ASSETS> 12,893
<PP&E> 1,038<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,216
<CURRENT-LIABILITIES> 1,343
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 52,343
<TOTAL-LIABILITY-AND-EQUITY> 16,216
<SALES> 254
<TOTAL-REVENUES> 254
<CGS> 731
<TOTAL-COSTS> 731
<OTHER-EXPENSES> 8,338<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> (8,325)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,325)
<EPS-BASIC> (0.96)<F4>
<EPS-DILUTED> 0
<FN>
<F1>Securities, Item 5-02(2), are net of accrued interest and unrealized gain/loss.
<F2>PP&E, Item 5-02(13), shown net accumulated depreciation.
<F3>Other expenses, Item 5-03(b)3, consists of research and development costs.
<F4>EPS Basic, Item 5-03(b)(20), consists of basic earnings per share.
</FN>
</TABLE>
